Australian Dollar Outlook Bleak: AUD/USD Eyes RBA, Delta Variant, Beijing Crackdowns

While the Australian Dollar gained some ground last week against its major counterparts it was slow to gain, progress was not very impressive.

Australian Dollar Outlook Bleak: AUD/USD Eyes RBA, Delta Variant, Beijing Crackdowns

 For AUD/USD though, it meant a material pause in what has been a top that has seen prices decline over 7.5% since February. The outlook is being impacted by fundamental dynamics that are likely to continue, so the road ahead for the Aussie will be bumpy.

All eyes will be on the Reserve Bank of Australia's (RBA) interest rate decision. The central bank is likely not to change key settings and so all eyes are on it. Although the RBA reduced bond purchases in part at its last meeting due to the high-contagious Delta variant, the recent rise in Covid cases could pose a threat to economic growth. The Australian Dollar could be at risk if the central bank is more cautious for a longer time.

This is as Australia's state of New South Wales reported record cases, with health experts noting that lockdowns could be here for longer. As a result of the surge in cases, Sydney may also reintroduce restrictions. This isn't just a problem in Australia; it could also be in other parts of Asia-Pacific, North America, and Europe. The commodity-linked Australian Dollar may be at risk if global growth is threatened by lockdowns.

Philip Lowe, Governor of RBA, will testify before a Parliament committee towards the end this week. These near-term risks could send Australian government bond yields lower. This may increase Aussie weakness. The AUD/USD ratio has been closely tracking the decline in Australian bond yields as well as Chinese equities since late. See chart below.

Many investors have sold their shares in Chinese and Hong Kong shares as a result of Beijing's crackdown on technology and education. The world's second largest economy is at greater risk of losing its profitability, which could cause slower growth. China is Australia's largest trading partner. A slowdown in one could have a ripple effect on the other.

This week's non-farm payrolls data from the USA will wrap up. The world's largest economy is expected to add 925k jobs, up from 850k in July. Also, the unemployment rate will drop to 5.6% from 5.9% in previous years. Economists are now seemingly overestimating the health and vigor of the economy, opening the door to a disappointing print. If Fed tapering bets are further pushed, then the AUD/USD could gain strength.

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