The AUD/USD plummets: on Monday, the aussie approached the 67-figure mark, while it was heading towards the base of the 65th price level on Tuesday. The downward dynamics are driven not only by the greenback's strength but also by the Australian dollar's weakness. The Reserve Bank of Australia's December meeting did not work in favor of the bulls. As a result, the AUD lost ground.
It is worth noting that overall, the RBA implemented the baseline scenario, keeping the interest rate unchanged and allowing for additional tightening of monetary policy "if necessary." However, the tone of the accompanying statement has somewhat softened – some formulations in the document disappointed the bulls, although nothing fundamentally changed. The central bank only pointed out that in the conditions of the high interest rate, the Australian economy has "cooled somewhat." In addition, the central bank took note of the high level of uncertainty regarding the prospects of the Chinese economy and the impact of external conflicts.
China has been a source of concern recently. Amid a sharp increase in respiratory diseases, last week there was information that the profits of large industrial enterprises in China from January to October decreased by a significant 7.8%. In addition, the Chinese Manufacturing PMI dropped to 49.4 points in November (the worst result since July). The rating agency Moody's lowered its credit rating outlook for China from "stable" to "negative." Among the main reasons are the expected slowdown in economic growth and high risks in the real estate sector. According to Moody's economists, China's annual GDP growth will slow to 4% next year and in 2025, and average 3.8% from 2026 to 2030.
As for the cooling of the Australian economy (mentioned in the RBA's accompanying statement), there are currently indirect signs. For example, the volume of retail sales in October decreased by 0.2% after weak growth (0.9%) in September. The indicator turned negative for the first time since June. The Manufacturing PMI is also declining. In November, the indicator reached 47.7 (a downtrend has been observed for the third consecutive month).
However, these indicators are of secondary importance, while the third quarter GDP report will be released on Wednesday. If this indicator also turns out to be in the "red zone" (given sufficiently weak forecasts), the aussie will come under significant pressure. According to most experts, the Australian economy grew by 1.8% in annual terms in the period from July to September. For comparison, in the third quarter of 2022, the GDP volume increased by 5.9%, in the fourth - by 2.6%, in the first quarter of 2023 - by 2.4%, and in the second quarter - by 2.1%. The trend is clear, so if the indicator even meets the forecast level (not to mention the "red zone"), we can confirm the theory that the Australian economy is cooling. In quarterly terms, the GDP volume should grow by a modest 0.4%.
In summary, we can draw several conclusions.
Firstly, following the December meeting, the RBA implemented the basic, most expected scenario. No one expected any policy changes; however, the rhetoric of the final statement was softer than the expectations of most experts. RBA members are concerned about China and the cooling Australian economy, and this fact itself reduces the hawkish tone of the central bank. Therefore, the Australian dollar reacted to the soft stance of the accompanying statement.
The second conclusion somewhat contradicts the first: the question of tightening monetary policy is still on the agenda. The central bank did not emphasize the slowdown in monthly inflation in October (the Consumer Price Index came in at 4.9% against a forecast of 5.2%). However, it indicated that the need for another rate hike would depend on incoming data and assessments of current risks. This suggests that the decisive role here will be played by inflation growth data for the fourth quarter. The corresponding report will be published early next year, but it will precede the first RBA meeting in 2024 (scheduled for February).
The third conclusion is that the Australian dollar remains a "follower" in the AUD/USD pair. There are no strong arguments for a reversal in the aussie's price. Therefore, an upward dynamic is possible under the condition of a broad US dollar weakness.
From a technical perspective, the pair retains the potential for further decline. At the moment, the aussie is testing the support level at 0.6550 (the lower line of the Bollinger Bands indicator on the 4-hour chart). There is a high probability that the bears will push through this target, so the main target for the downward movement is slightly below, at the 0.6500 level (the Kijun-sen line on the daily chart).
