Australian Dollar: From strongest to bottom of the pack

So far this year, the Australian dollar has been one of the most eye-catching currencies. Even after the U.S.-U.K.-Iran war broke out in March, AUDUSD briefly hit fresh highs in a harsh environment, edging close to 0.72, with a gain of more than 6% for the year. However, over the past week, AUDUSD has posted six consecutive bearish candles, sliding from above 0.7 to as low as 0.6830, delivering the worst monthly performance since December 2024.

1. Why did the Australian dollar undergo a rapid shift from “strongest” to “weakest”?

• Risk-off sentiment takes a hit: Tensions in the Middle East have continued to escalate, global stock markets have performed poorly, and risk off sentiment is the primary driver behind the Australian dollar’s retreat from elevated levels.

• Fundamental advantages are weakened: Previously, the AUD strengthened thanks to Australia’s solid fundamentals and the Reserve Bank of Australia’s hawkish stance. However, in March, the RBA raised rates with a slim 5-4 majority. Divergence within the committee intensified, and with February’s Australian CPI coming in below expectations, market confidence in the continuity of the RBA’s rate-hike policy was weakened. More critically, major central banks in Europe and the U.S. have recently turned hawkish one after another, greatly reducing the relative advantage of the RBA’s hawkish stance. The most obvious manifestation is that after the ECB turned hawkish, EURAUD rebounded sharply.

• Commodity factor at play: The recent sharp drop in industrial metals has dragged on the Australian dollar, but since this week, the AUD’s weakness has clearly gone beyond the impact range of industrial metals, and there has been a divergence between AUDUSD and the Bloomberg industrial metals index.

2. Looking ahead, how can AUD stage a comeback?

Although AUDUSD has already pulled back by more than 300 pips from high levels, CFTC positioning shows that the AUD is still in a net long position, so direct AUD pairs and cross pairs may still have room to keep falling.

In the short term, based on technicals, the 0.68 level—now a former resistance turned support after being broken—will provide some support to AUDUSD. But until the Middle East situation becomes clear and global risk sentiment improves, the author believes AUDUSD will be difficult to rebound sharply; the trading range may be 0.68–0.7.

But in the medium to long term, once the U.S.-Iran conflict eases toward its end, and considering a rebound in risk sentiment and falling expectations for rate hikes in the U.S. and Europe, the Australian dollar will benefit. The author expects its performance to be better than other non–G10 currencies such as the euro and the renminbi. Therefore, the author still leans toward taking some medium-to-long-term bullish positions on the left side when AUDUSD is approaching 0.68.

Source of this article: Good Morning FX Market

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