The cooling of the Australian economy and the RBA’s monetary expansion have not discouraged AUDUSD bulls. They have taken advantage of the global process of capital repatriation. Let’s discuss these topics and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The RBA will cut rates in July and twice more in 2025.
- China’s economy may slow to 3.5%.
- Investors are divesting from US assets.
- Long trades can be considered if the AUDUSD pair breaks through 0.6565.
Weekly Fundamental Forecast for Australian Dollar
When the system malfunctions, it is unreasonable to expect the established rules to remain effective. The recent changes to the international trading system spearheaded by Donald Trump have raised concerns about the principles of fundamental analysis, such as “a robust economy fosters the value of a currency” and “financial capital tends to gravitate toward higher-yielding investment opportunities.” The AUDUSD pair serves as a prime illustration of this trend.
In May, the Reserve Bank of Australia (RBA) reduced its key rate by 25 basis points to 3.85% and discussed a more aggressive cut of 50 basis points. Following a series of reports indicating an economic slowdown, the derivatives market currently gives an 80% probability of the cycle persisting in July. By the end of the year, the market is anticipating three acts of monetary expansion, more than the Fed’s expected cuts. On paper, the AUDUSD pair should have plummeted.
Central Banks’ Interest Rates Trajectory
Source: Bloomberg.
Furthermore, the Australian economy is slowing. In May, employment decreased by 2,500, which contrasted with the Bloomberg experts’ prediction of an increase of 21,200. Inflation data was also disappointing. On a yearly basis, inflation decreased from 2.8% to 2.4%, while consumer price growth in May fell from 2.4% to 2.1%. This decline suggests a softening of domestic demand, prompting the RBA to consider policy easing.
This is particularly relevant given China’s status as Australia’s primary trade partner and the economic challenges it is currently facing. Industrial profits in China declined by 9.1% in May, notching the largest drop since October. Disappointing data on industrial production and investment prompted Capital Economics to lower its GDP forecast for 2025 to 3.5%.
The AUDUSD pair should have faced severe headwinds. However, the Australian dollar surged above the upper limit of the consolidation range between 0.645 and 0.655. The primary cause is the decrease in the appeal of US assets and the repatriation of capital to their home countries by Australian companies and pension funds.
Concerns regarding President Trump’s tariff and tax plans have prompted investors to withdraw capital from the US market. They believe that the uncertainty surrounding the US administration’s policy leads to higher risk premiums compared to those offered by Treasuries. At the same time, the decline in the value of the US dollar further diminishes the potential returns on investments.
USD Index Performance and 10-Year US Treasury Yield
Source: Bloomberg.
The process of capital repatriation is taking place globally. A significant amount of capital, amounting to trillions of dollars, has been invested in US stock and bond markets and is now being repatriated to Europe, Asia, and Australia. Against this backdrop, the US dollar has lost value against all G10 currencies since the beginning of the year despite the Fed maintaining its federal funds rate at 4.5%.
Weekly AUDUSD Trading Plan
Considering all the above, capital flight from the US is likely to persist, allowing the AUDUSD pair to increase. Therefore, if the pair breaks through the resistance level of 0.6565, one may consider opening long trades, adding them to the ones formed on a rebound from 0.64.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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