Growing concerns over slowing global economic growth and softening Australian inflation data have driven the Aussie down to US$0.6375 as of 10:30 am today, slumping as investors flee for the safe haven of the US dollar despite stronger-than-expected GDP growth (0.4% vs 0.3%).
"The Aussie faces three strong headwinds," Sean Callow, a senior currency strategist at Westpac, said in an interview with the Australian Financial Review. "A resilient US dollar, concerns over China and the Reserve Bank [are] not doing it any favour in terms of yield."
The RBA maintained the cash rate at 4.10% this month, reinforcing expectations the central bank would not raise rates again this cycle.
Aussie suffers as China’s economy falters
Economic headwinds have been a common experience this year – manufacturing data from Germany, Britain and the Euro area indicates a fall in activity.
Much has also been made of China’s failing construction sector, with major construction corporations like Evergrande (HK:3333) falling to over-leveraged debt.
The Caixin/S&P Global services purchasing managers' index (PMI) dropped to 51.8 in August from 54.1 in July, the lowest reading since December, at the height of COVID-19 lockdowns.
New export business also fell for the first time since December, business confidence for the 12-month outlook reached a nine-month low and the rate of input cost inflation cooled to a six-month low, while selling prices increased at the slowest rate since April.
The result was a tumbling yuan, worth just US$0.1367 per yuan as of 10:30am today.
Australia’s close trade relationship with China meant the Aussie was dragged down with it, often used as a 'liquid proxy' for the yuan given China is our biggest importer of commodities.
In response, currency traders are betting against the Aussie, which has lost more than a full US cent since last week.
Short positions growing
Callow pointed out that real money accounts set a record net short position in the Australian dollar of 95,000 contracts, up from 92,700 contracts the previous week.
This brought the face value of net shorts to $9.5 billion as leveraged funds cut back their net long positions to 12,000 from 19,000 contracts.
He says the next target for the Australian dollar is US$0.62.
Tom Kennedy, an economist at JPMorgan (NYSE:JPM), indicated that the Australian dollar was oversold and predicted a recovery.
"If you look at commodity prices, interest rate differentials, and even the more incremental data around China, I would say those things are pretty supportive," he said.