The AUD/USD relentless sell-off accelerated as the number of Covid-19 cases in Australia jumped and after the Federal Reserve published hawkish minutes. The pair fell to 0.7200, which was the lowest level since early November last year.
Covid-19 clouds Australian recovery
The Australian economy is struggling as states maintain their lockdowns because of the rising number of Covid-19 cases. Recent data showed that the services PMI declined sharply in July while retail sales have declined substantially.
While the country’s labour market remains strong, there are signs that the lockdown will affect the situation. Data published on Wednesday showed that the country’s wage growth struggled in the second quarter.
Meanwhile, the bureau of statistics published relatively strong July employment numbers. The data showed that the country’s economy added more than 2,000 in July, the lowest additions in months. A deeper dive shows that most of these jobs were part-time. Full-time jobs declined.
At the same time, the country’s unemployment rate declined from 4.9% in June to 4.6% in July. This was the lowest level in about 12 years and is evidence of how fast the economy has been recovering before this outbreak. The participation rate, which measures the percentage of people in the labour market, declined from 66.2% to 66.0%.
Therefore, there is a possibility that the country’s economy will continue to struggle in the coming months. For one, New South Wales reported more than 600 new Covid-19 cases, the highest level since last year.
The AUD/USD weakness accelerated after New Zealand moved to level 4 of lockdown as the government attempted to curb the spread of the pandemic. New Zealand and Australia are close trading partners.
The AUD/USD pair also struggled as commodity prices declined. In the past few days, the prices of most commodities like crude oil and iron ore have retreated substantially.
This decline is mostly due to the recent uptick of cases in China. Indeed, the country has even partially shut down one of its biggest ports to curb the spread. China is the biggest buyer of commodities globally. The chart below shows the performance of the Bloomberg Commodities Index (BCOM) in the past month.
Bloomberg Commodity Index chart
The Australian dollar is often seen as a proxy for commodities because of the country’s vast exports.
Meanwhile, the AUD/USD also declined because of the relatively hawkish Federal Reserve. The Federal Open Market Committee (FOMC) published the minutes of the last meeting on Wednesday. These minutes showed that more Fed officials were tilting towards reducing the volume of asset purchases.
Therefore, there is a possibility that the Fed will start tapering its asset purchases in the next few months. This will depend on the trends of Covid-19 cases in the US and the upcoming economic data. The Fed will hold its next meeting in the last week of September.
The next key catalysts for the AUD/USD will be the latest US initial jobless claims and the Philadelphia Fed manufacturing index.
AUD/USD technical analysis
The four-hour chart shows that the pair has been in a steep sell-off lately. Along the way, the pair has moved below the important support at 0.7292, which was the lowest level on July 21st. The pair also moved below the 25-day and 50-day Moving Averages, while the MACD moved below the neutral level.
Therefore, the pair’s path of least resistance is lower, with the next key support level being at 0.7200. On the flip side, a move above 0.7290 will invalidate this view.