Australian Dollar Forecast: RBA Sticking to QE Taper Can Lift AUD/USD
Australian Dollar Analysis and Talking Points
- Copper Supply Disruption Risks at World’s Largest Copper Mine
- Australian Lockdown Well Priced into the AUD
- AUD Can Snap Higher on Unchanged RBA
Copper Supply Disruption
Modest gains for copper prices to begin the week amid rising supply disruption risks as the Union at BHP’s Escondida copper mine overwhelmingly rejected the company’s final labour contract offer. In turn, there will be 5-10 days of government mediation where failure to reach an agreement will see Union workers strike at the copper mine. Keep in mind that the Escondida mine accounts for 5% of global supply, making it the largest copper mine in the world. Therefore, should a strike become the most likely outcome, this could underpin copper prices and by extension the Australian Dollar.
Since the prior meeting, lockdown measures across Australia have been more widespread and longer-lasting, which in turn has seen the market become much more bearish on the Aussie. Although, on the domestic front, negative risks look to be appropriately priced into the currency and therefore the greater focus should be placed on external factors, namely China. In recent weeks, Chinese authorities have triggered market turbulence following a wave of regulation measures, however, the risks to the Aussie may stem from Chinese lockdown risks. Weekend reports stated that 41,000 people had been placed under stay at home orders and while this is a relatively small number of people, this does provide a risk of a larger lockdown should infections spread.
RBA Sticking to QE Taper Can Lift AUD
The aforementioned lockdown measures have seen markets push back against the view that the RBA will go ahead as originally planned to taper QE from September and thus expect the RBA to at least delay or potentially boost the pace of asset purchases. Of note, the original plan had been to taper bond purchases to AUD 4bln/week from AUD 5bln.
That being said, the RBA had previously acknowledged that once outbreaks are contained and restrictions are eased, the economy bounces back quickly. What’s more, RBA members noted that part of their agreed framework for making decisions on bond purchases had been to take account of the decisions of other central banks. Keep in mind, that both the BoC and BoE had persisted with plans of tapering the pace of asset purchases at a time where virus cases were rising and lockdown measures were either imposed or maintained. As such, with a market already bearish on the Aussie and seemingly positioned for a delay in tapering QE purchases, sticking to the current script by the RBA can be expected to provide an initial lift to AUD/USD, although whether this will be sustained depends on if China and covid risks ease.
AUD/USD: Taking a look at the chart, since the June breakdown, the pair have respected the 20DMA. In turn, a close above would be needed to negate immediate downside risks on the currency. This also coincides with the 2020 peak at 0.7413, which capped the recovery last week. Despite risks regarding the Delta variant across Australia, I am leaning on the bullish side for AUD with an unchanged RBA to allow for a return to 0.7400. Should the RBA delay or expand QE purchases, the YTD low would likely be at risk.
AUD/USD Chart: Daily Time Frame
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