Australian Dollar Fundamental Forecast: Bearish

• Australian dollar looks to remain vulnerable in the week ahead.
• Global COVID-19 cases, falling iron ore prices pose risks.
• Eyes on Fedspeak as Treasury yields begin rising again?

The Australian dollar just barely managed to end the week with a gain against the US dollar, but AUD/USD relinquished the majority of its upside progress towards the end. Initially, the Reserve Bank of Australia surprised investors by sticking to its plan of tapering weekly asset purchases later this year. This is despite rising risks to the local economy amid persistent lockdowns to tame the spread of COVID-19.

In fact, Australia may see GDP contract in the coming quarters, opening the door to a technical recession after just climbing out of one last year. The central bank is looking past near-term risks, favoring the broader economic outlook. What ended up damaging AUD/USD was Friday’s stellar US non-farm payrolls report. That sent US Treasury yields rallying, with the 10-year seeing its best performance in six weeks.

The Aussie still remains vulnerable in the coming week, with global COVID-19 cases still on the rise, threatening isolated lockdowns or various restrictions. A slowdown in the world economy may bode ill for Australia’s economy, which finds itself at the front-end of the supply chain, exporting precious metals such as iron ore. In fact, the prices for the latter are down about 25% from peaks in May.

This comes amid efforts from China cracking down on steel output in order to reduce pollution. The world’s second-largest economy also has the highest appetite for the material. That may undermine recent Australian trade data showing that iron ore exports to China gained by the most on record in June. Markets are forward-looking, so traders may be pricing in a slowdown to these figures in the coming months.

Meanwhile in the United States, more Fed members have been speaking up about tapering quantitative easing. These include Richard Clarida, Christopher Waller, and Robert Kaplan last week. In the week ahead, speeches from Raphael Bostic, Thomas Barkin, Loretta Mester, and Esther George will cross the wires. The markets will likely be gauging their tone about policy to see just how close tapering could be after NFPs.

AUD/USD Vs. US Dollar Index, Iron Ore Futures and 2-Year Government Bond Yield Spreads

Chart Created Using TradingView