The Australian dollar (AUD) against the US dollar (USD) is expected to experience a significant monthly decline in October, marking its largest drop since September 2022.
The currency pair has been on a downward trend for the past four weeks, closing last week at 0.6604, reflecting a 1.52% decrease. This performance places it as the third-worst performer for the month, behind the Japanese yen (JPY) and the New Zealand dollar (NZD). Traders and analysts are concerned about the possibility of further declines in the near future.
The strength of the USD has been supported by various economic indicators and the upcoming US elections. There is a possibility of a Republican 'red sweep,' which could result in increased tariffs, inflation, and higher yields, negatively impacting the AUD/USD exchange rate. On the other hand, a victory for Kamala Harris, along with a divided Congress, is expected to maintain the current Federal Reserve policy, potentially favoring the Australian dollar.
The timing of China's National People's Congress Standing Committee meeting is also crucial. The meeting is expected to unveil a fiscal stimulus package, but its timing may be postponed until after the US election results are known. The outcome of the US elections, particularly a Trump victory, could prompt a larger stimulus from China as a countermeasure to potential tariffs, further influencing the dynamics of the AUD/USD pair.
In terms of inflation trends, headline inflation in Australia rose by 1% in the second quarter of 2024, resulting in an annual rate of 3.8%. This is the first annual increase in the consumer price index (CPI) since the fourth quarter of 2022. The Reserve Bank of Australia (RBA) reported that its preferred measure, the trimmed mean, increased by 0.8% quarter-on-quarter, with an annual rate of 3.9%. Despite a slight decline, inflation remains above the RBA's target range of 2-3%, leading to speculation about future monetary policy adjustments.
Looking ahead, expectations for the third quarter of 2024 suggest a modest increase in headline inflation by 0.4% quarter-on-quarter, translating to an annual rate of 2.8%. The trimmed mean is projected to rise by 0.7% quarter-on-quarter, potentially lowering its annual rate to 3.4%. Market participants are closely monitoring these indicators, as a trimmed mean reading of 3.4% or lower could significantly increase the likelihood of a rate cut by the RBA by year-end.
From a technical perspective, the AUD/USD has been on a downward trajectory since it rejected a multi-month downtrend resistance at the 0.6900 - 0.6910 range in late September. The currency pair recently breached the critical support region of 0.6650 - 0.6625, including the 200-day moving average at 0.6627. This breach opens the possibility of a sell-off, with the next downside support level identified at 0.6500. Analysts suggest that a potential 'red sweep' in the upcoming US elections could accelerate the decline towards multi-week trend channel support, estimated at approximately 0.6380 - 0.6350. However, a daily close above resistance around 0.6680 - 0.6720 would indicate a potential easing of selling pressure, providing some hope for the Australian dollar amidst ongoing challenges.
Traders and investors are closely monitoring economic indicators and geopolitical developments that could further impact the AUD/USD exchange rate in the coming weeks.