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By Chris Tedder, Research Analyst, Forex.com

The Aussie has been dealt a one-two punch from which it may not recover. Fears about slowing growth in China are weighing on the Australian dollar and at the same time the US dollar is being bolstered by comments from the Fed suggesting it is getting ready to wind down QE3, creating a toxic cocktail for AUDUSD.  Added to the mix is the looming threat of a peak in mining investment and, incidentally, the possibly of a more dovish RBA.

AUD may need to be lower before it can move higher

The main thing working for the Australian economy at the moment is recent weakness in the Aussie, which is alleviating pressure on trade-exposed sectors of the economy. The question is, will a lower Australian dollar be enough to spur growth in non-mining sectors of the economy, so that the transition away from mining investment is smoother than current economic data suggests it will be? It is possible that the lower Australian dollar will spur growth and inflation, thereby removing the need for the RBA to lower rates further, and possibly even resulting in the bank raising rates sooner than expected. However, it’s too early to tell what impact the lower Australian dollar, assuming it stays around current levels or weakness a little more, will have on the economy. Although, a weaker dollar may be needed before it is allowed to substantially increase in value.

Today, AUDUSD suffered due to weak Chinese manufacturing data and a more hawkish than expected FOMC overnight. The idea that the Fed may start tapering asset purchases sooner than expected, possibly resulting in an end to QE3 by mid-2014, sent investors flocking to the US dollar. In China, HSBC’s private sector manufacturing PMI reading dropped to 48.3 from 49.2, missing expectations of 49.1. Today’s weak Chinese data follows on from a slew of weak manufacturing and trade data over the last month or so, which is compounding the Aussie’s problems.

The end result is the Australian dollar smashed through a significant support zone around 0.9380. From here we are watching 0.9150 – 38.2% retracement level from all-time high – and then 0.8550.

 

Source: Forex.com