Over the last period of time the Australian dollar has been weighed down by four different factors:

  • Rising Covid cases and low vaccination rates,
  • A slow down in global growth as covid lockdowns bit again,
  • A slowdown in China’s growth,
  • A sharp drop in Iron ore prices (Australia’s largest export). This was partially offset by falling coal prices.

This led many asset managers to be short the AUD. However, the tide should be starting to turn now for the AUD and some of these AUD short positions are looking stretched now.

Watch the labour market

At the RBA’s last interest rate meeting, they were what can be described as ‘hawkish in deed, dovish in word’. The RBA gave up defending the April 2024 yield curve in what would be seen as a ‘hawkish’ act. However, Governor Lowe then talked back expectations of 2022 interest rate hikes saying that it was ‘highly unlikely’. The

RBA Governor maintained a 2024 date for rates lift off.

The RBA board also require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is where the RBA want to see the inflation being driven from. The RBA see that is ‘likely to take some time’. The last labour data from the AUD out last week was terrible. However, note that the survey for this report was conducted before the reopening of Australia’s second-most populous state, Victoria. Furthermore, it was also only in the early days of the reopening of the most populous state of New South Wales.

So, the November report should show much better numbers.

At some point the AUD will reach peak bearishness and overstretched on the short positions. Vaccination data out of Australia shows that they have now overtaken the UK, the US, and Europe in their roll out program.

The key focus going forward will be looking out for any good news to lift the AUD One key contender looks to be next months jobs data which could see a nice spike higher in the AUD on the release. If we do see a material turnaround in the labour market then the go-to currency pair for trading this shift would be the AUDNZD.