Australian Dollar May Fall as Global Growth Fears Fester

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The Australian Dollar seems to be trading as a barometer of the markets’ global recession fears. This is not out of character: the Aussie is frequently tracking broader benchmarks of market-wide sentiment trends, like major stock indices.

This is because of Australia’s gearing to commodity exports and to China, its biggest overseas market and itself a lynchpin in the global supply chain. The setup makes the local business cycle relatively sensitive to changes in the global one. This echoes into policy expectations, yields and the exchange rate.

Worries about a global recession have preoccupied investors in recent weeks. Growth forecasts have been slashed as brisk monetary tightening arrives alongside potent parallel headwinds. Covid-containment lockdowns have stalled growth in China while the war in Ukraine continues to stoke geopolitical uncertainty.

The average estimate for global GDP growth in 2023 from a survey of economists polled by Bloomberg fell from 3.5 to 3.2 percent – a change equivalent to about US$25 trillion – in the second quarter of this year. The Australian unit shed over 9 percent over the same period, despite a concurrent hawkish pivot at the RBA.

Australian Dollar May Fall as Global Growth Fears Fester

Next week, this narrative will be shaped by commentary from a G7 leaders’ summit in Germany, a NATO meeting in Madrid, and the annual ECB forum on central banking in Sintra, Portugal. The latter will bring speeches from Fed Chair Jerome Powell, ECB President Christine Lagardeand BOE Governor Andrew Bailey.

Turning to the economic calendar, measures of US and German consumer confidence and inflation are in focus. June’s official Chinese manufacturing PMI survey and the analogous US ISM report are also due to cross the wires, offering a timely view of growth trends in the world’s top two economies.

The path of least resistance through this maze of influences seems to favor Aussie weakness. It is unlikely that anything emerging from next week’s summitry will fundamentally alter near-term macroeconomic trends. Meanwhile, “stagflation” cues are expected to mark outcomes on the data front.

Trading analysis offered by RobotFX and Flex EA.