Why is Australian dollar under pressure - Kalkine Media

November 26, 2021 06:45 PM AEDT | By Akanksha Vashisht
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Highlights

  • The Australian dollar has been trending downwards in the last one month.
  • The domestic currency appears to be bearing the brunt of a hawkish Fed.
  • The AUD would be susceptible to drastic changes in the days ahead as economic recovery takes shape.

The Australian dollar (AUD) recently plummeted to its three-month low level after showing an initial rally a day before. The decline in AUD came soon after the retail sales data was released in the morning. The data, reflecting a recovery in the Australian economy, failed to prompt a recovery in the domestic currency.

The domestic currency has fallen by over 1 per cent this week, marking its fourth straight week of loss. Over the past 30 days, the AUD/USD pair has plunged by over 5 per cent. Following the pattern of AUD, the Kiwi Dollar also plunged to its three-month low recently, recording a drop of about 2.4 per cent this week. The decline in both currencies came amid a broad-based rally in USD.

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Stronger USD affecting AUD

Changes in the USD have significantly contributed to a fall in AUD over recent days. Meanwhile, external factors are contributing to the observed volatility in the AUD/USD pair. The domestic currency has been considerably impacted by the hawkish Fed, which continues to stand out among most of the central banks in terms of monetary policy tightening. As the Australian central bank is expected to take a dovish stance on cash rates for quite some time, the US dollar is likely to strengthen further while keeping the Australian dollar under pressure.

With the Australian dollar looking highly oversold at the moment, the market is likely to see multiple attempts to rebound. If the economic data continue to progress in favour of the USD, the AUD could soon breach past its lowest level seen in August, or even worse.

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Given the fast pace of recovery seen in the US, the above may not be such a distant reality. This had prompted expectations of increased tapering. However, the Reserve Bank of Australia (RBA) has been persistently clarifying that a rate hike is not on the cards anytime soon. Unlike the RBA, the Reserve Bank of New Zealand has recently embraced a rate hike for the second time in a row recently, much to the disappointment of the hawks.

Improved US economic growth could further affect AUD.

With economic recovery taking different shapes across the globe, greater volatility in the currencies can be expected in the days ahead. Meanwhile, as the Australian labour market strengthens and the economy reopens, the AUD would be susceptible to drastic changes.

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