Financial Source:

Top Trading Opportunities

W/c 2 - 6 August 2021

Analyst: Arno Venter

Bad News Stacking Up For AUD
It’s going to be an important week for the Aussie Dollar with the RBA policy decision setting up to be a The current virus situation is a big complication for the Australian economy as well as expected policy
very interesting one given the recent developments. From the middle of Q1, the AUD has been trending normalization from the RBA. Australia has been much slower in their vaccination drive compared to
lower and lower against most of its major peers, with only the JPY being weaker than the AUD. countries like the UK and US, and unfortunately the Delta variant has been taking its toll.

The lack in upside was partly driven by the RBA’s persistently dovish stance compared to banks like The rise in virus cases have prompted the reinstatement of strict lockdown rules and despite hopes of
the RBNZ, BoC and BoE, and some of it was also a bit of froth unwinding and some USD strength. easing those measures this week saw four-week extension of lockdowns in New South Wales.

Throughout this time, we’ve held a weak bullish bias for the AUD, given the continued positive risk Reports on Friday stated that military personnel have been deployed in certain parts of the country to
appetite in the med-term, the better-than-expected econ data, better-than-expected economic recovery help reinforce lockdown rules. As a result of the lockdowns, we’ve seen a few market participants now
post-pandemic, as well as commodity prices surging which favoured Australia’s terms of trade. forecasting a contraction for Q3 growth and some also pushing back rate hike expectations to 2023.

However, recent developments have made us change our fundamental outlook for the AUD from weak The government has pledged support to help alleviate some of the economic pressure, and even
bullish to Neutral given the heightened uncertainty on a couple of different fronts. though a full recovery is expected, this short-term hiccup does complicate matters for the RBA.

Week Ahead: Top Trading Opportunities Analysis

Continued
Anticipation that the RBA could walk back their recent reduction in asset purchases further exacerbates The other interesting driver this week was Iron Ore futures that suffered some punchy moves lower on
the growing policy divergence between the RBA and banks like the BoC and RBNZ, which is expected Thursday and Friday, with TSI Iron Ore futures down close to 13% at the time of writing. The push
to see the AUD underperform its high-beta pro-cyclical counterparts until the hiccups are resolved. lower was attributed to China announcing some sizable increases in tariffs for steel products.

Seasonality is the other negative factor. In the last 20 years, August has been the worst performing This comes from China’s drive to lower emissions. This is important for Australia because Iron is
month for the AUD with an average performance of -0.95% and seeing losing months 70% of the time. their biggest export (23.8% according to 2019 OEC data), and over 80% of that goes to China alone.

However, the reason for this seasonal blip is less to do with the Australian economy and more to do Thus, the fears of slower production and slower demand from China is not only bad for Iron Ore prices
with the AUD’s high-beta characteristics. As the Northern hemisphere summertime kicks in and traders but also bad for Australia as well. The other factor to watch is the current fears of a bigger-than-
swap their desks for the beach, we usually see a considerable drop in liquidity and volumes in August. expected slowdown in the Chinese economy after the PBoC did a 0.5% RRR cut a few weeks ago.

More often than not this type of environment translates into higher levels of market volatility which could Despite all of these drivers the reaction in the Aussie Dollar was more muted this week than we would
spark risk off flows which negatively impacts the high-beta currencies like the AUD. have anticipated and will be a key currency to watch in the sessions ahead.

Week Ahead: Top Trading Opportunities Analysis

Trading Plan
Our attention for the AUD turns to the incoming RBA meeting where markets want to find out how the
recent developments have impacted the bank’s assessments of the economy and how it could
potentially affect policy.
Recall that during their previous meeting the RBA announced that they are planning to scale down
their weekly asset purchases to $4bln from $5bln in September, with a plan to buy at that pace until
their November meeting where they were planning to decide the future of their QE program.
However, with the current virus situation and question marks emerging about China, there are quite a
few participants who think that the RBA will announce a delay of their plans to taper purchases
in September. There are some like Westpac, who expects the bank to announce an immediate
increase in asset purchases to $6bln per week at next week’s meeting.
That will certainly provide markets with a clear signal about the bank’s resolve to keep
policy accommodative for as long as needed to allow the economy to recovery and rebound.
Below is a breakdown of the possible bullish outcomes in the week ahead:
Below is a breakdown of the possible bearish outcomes in the week ahead:
The one caveat to keep in mind about a potential surprise increase in the weekly purchases is that
even though it usually is seen as a negative for the currency, there is the odd chance that the market
might interpret such a move as positive as more accommodative policy could foster a stronger rebound
when the virus situation eventually calms down.
That is of course not the baseline expectation for such an announcement but it’s always good to think
about the way that markets could surprise in the way that it reacts to ‘surprise’ announcements.
DISCLAIMER:
Remember that the potential outcomes and potential market reactions in this report is merely a guide for what
we would expect in the event of the various outcomes and that the market can always surprise. Thus, the
above is never intended as trade calls but rather intended as a framework for your own scenario planning.
These reports are provided to you for informational purposes only. This report is not, and is not constructed
as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed
as an opinion as to whether you should enter traders on investments or any other transaction.
Opinions, estimates, analysis, and projections contained herein are our own as of the date hereof are subject
to change without notice. The information and opinions contained herein have been compiled or arrived at
from sources believed reliable but no representation or warranty, express or implied, is made as to their
accuracy or completeness. We do not accept any liability whatsoever for any direct or consequential loss
arising from any use of this report or its contents.
Week Ahead: Top Trading Opportunities Analysis
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Financial Source: Top Trading Opportunities