The trading volume for the Australian dollar has been light this week because of a two-day bank holiday in the country, giving it a bit of reprieve from what is happening in the market. With major forex trading and banking institutions closed, volatility was also low.
As markets reopened Wednesday, a price gap between the AUD and the USD occurred. Analysts had anticipated this gap for weeks, and it will likely widen if the market does not make its corrections swiftly enough.
The price gap is mainly due to the US dollar’s heightened volatility, reports noted. The plunge in Asian stocks also made matters worse as they retreated again on Wednesday in an extension of a fall that began last week. Stocks fell when fears of a global economic slowdown made the headlines, but other factors also affected the US dollar’s decline.
What is happening in the US?
Investors reportedly became unnerved by the US federal government’s partial shutdown and did not pay much attention to President Donald Trump’s pronouncements against the Federal Reserve and its Chairman, Jerome Powell. Reports varied on Tuesday and Wednesday, however, as US newspapers claimed that Wall Street plummeted due to Trump’s tweets. One such tweet stated that the Fed was the US economy’s “only problem,” and some experts agree with Trump.
“In the end, we believe that the Fed is the only presence capable of ending the current confusion in the markets,” said Kenta Inoue, Senior Market Economist at Mitsubishi UFJ Morgan Stanley Securities.
A crisis group?
What truly raised concerns, according to analysts, was US Treasurer Steven Mnuchin’s efforts to assuage the fears of investors. He said that the financial crisis of 2008 worsened due to a lack of liquidity in the country’s credit markets. Mnuchin also convened a crisis group, according to reports, and the market got wind of it.
He spoke to the leaders of the six largest banks in the United States on Sunday to ask if they are liquid. They reportedly confirmed that they have “enough liquidity to keep on lending” and that the markets should “continue to function properly.”“In addition to concerns toward the US economy, the markets are now having to grapple with growing turmoil in the White House, which has raised political risk ahead of the year-end,” said Masahiro Ichikawa, Senior Strategist at Sumitomo Mitsui Asset Management.
US stocks experienced a steep drop in recent weeks due to what is happening at home. Democrats are blaming this on Trump, who solely blames economic headwinds on the Federal Reserve. Trump criticised Powell for his decisions despite the fact that he appointed Powell as Treasurer. The President’s tweets rattled investors further as they grapple with the possibility of a global financial crisis or a slowdown at the very least. Another contributor to investor anxiety is the strained trade relationship between China and the US.
Inoue also said that the White House is likely to move towards stopping the rout in stocks but noted that the federal government will likely remain shut down until the end of 2018. Additionally, Inoue raised concerns about trade relations between the US and China, saying that they show “no signs of a resolution.”
The Us dollar has received a beating since Christmas Eve as investors fled to safety. According to analysts, many bought into the Swiss franc and the Japanese yen.
Different scenarios
On Friday 21st December, AUD/USD was trading at 0.7032. It was down 0.0079 based on reports. Analysts noted that the AUD will not be able to change the trend to its advantage and that a counter-trend rally is likely going to happen in the coming days. Trader reaction will dictate the direction of the AUD/USD, according to experts. Considering the current situation, the market’s reaction will likely not be to the AUD’s benefit.
The AUD’s movement over 0.7020 will signal the presence of traders buying the currency and if this move creates enough momentum for it to rise, then the rally should extend from 0.7130 up to 0.7163. If the movement of the AUD goes below 0.7020, then this means that those holding the currency are selling it.
What affects the AUD?
Global growth outlook will impact the AUD’s value. With global growth predicted to reach a slowdown, the AUD should also take a hit. Commodity export prices will also affect the currency. If the money coming from exports is lower than what the country spends on imports, then the AUD’s value will decline. The fact that Australia’s biggest trading partner is the US plays a crucial role in the AUD’s worth. If the gap between the USD and AUD is wide, then the AUD will likely suffer.