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Australian dollar 2023 outlook: AUD may remain dependent on USD amid uncertainty

Australian dollar fortunes appear to be tied to the US dollar vortex to start 2023; the RBA and the Fed remain in tightening mode but at different trajectories and China faces re-opening challenges with Covid risks.

Source: Bloomberg

Australian dollar

The Australian dollar slipped on the first trading day of the year on Monday with most market participants yet to return from their New Year holiday. Furthermore, weaker than anticipated official Chinese PMI numbers published over the weekend may have contributed to the demise.

AUD/USD

Tuesday is likely to see many more players back on deck and deeper liquidity might lead to more significant flows. Monday’s move for AUD/USD was largely in line with the US dollar gaining ground across most markets.

US dollar

The US dollar has been underpinned by Treasury yields inching higher again after softening in early December. The benchmark ten-year note traded near 3.40% a month ago but is now back above 3.80%, still some way from the peak of 4.33% seen last October.

This may reflect the market’s re-assessment of the Federal Reserve’s agenda for the year ahead in terms of keeping rates higher for longer in an effort to get the inflation genie back in the bottle.

RBA and Fed

The RBA on the other hand has taken their foot off the tightening pedal despite inflation anticipated to go higher through 2023 according to their own forecasts. The path of this disparity might be crucial for AUD/USD this year.

Both the Federal Reserve and the RBA will be meeting in early February to decide on monetary policy.

China

Elsewhere, China could be another notable piece of the Aussie dollar puzzle. The tilt away from their zero-case Covid-19 policy may have significant impacts on Australian exports.

Since the pivot from Beijing, iron ore prices have moved back above US$100 a tonne and many other industrial metals have also seen some buoyancy in the aftermath.

Australia’s trade balance remains at record highs and with AUD/USD languishing on interest rate differentials, the domestic economy continues to benefit.

AUD/USD technical analysis

AUD/USD has been in the 0.6585 – 0.6893 range for two months as a descending trend line and an ascending trend line converge to create a Symmetrical Triangle formation.

A breakout of either side of this triangle might see momentum pick up in that direction and resistance could be at the prior peaks of 0.6893, 0.6916, 0.6956 and 0.7009.

On the downside, support may lie near the breakpoints and previous lows of 0.6669, 0.6629, 0.6585 and 0.6548.

AUD/USD chart

Source: TradingView

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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