AUD/USD has seen some weakness but we expect far more to come as China Australia's biggest export market slows up.

The AUD looks vulnerable as its main export market China slows up: “Iron ore alone accounts for 26% of all Australian exports - of which around 85% are shipped to China. Together with coal, of which about 11% also goes to China, these two commodities account for about 42% of Australian exports. With Chinese stockpiles of both iron ore and coal recently at very high levels, Australian exports could remain under pressure in the coming months especially if the property crisis in China continues. This is likely to weigh on the AUD.” (COMMERZBANK)

Iron ore looks set for far lower prices and this will weigh on the AUD the views of Goldman below. 

Iron Ore 

“While both port and in-plant iron ore stocks declined this week, visible stocks remain elevated compared to 'normal' August levels and mills' destocking (despite the drop in iron ore prices) could be an indication of a negative production outlook. This would not be surprising given only 1% of Chinese steel mills are currently profitable, according to a Mysteel survey Meanwhile, our China property team has cut their forecasts for gross floor area starts and completions for 2024, and our China economists have highlighted rising downside risk to Chinese growth, both of which could have negative implications for steel demand. In the absence of a hot metal output recovery, continued strong iron ore supply means that we maintain the view that iron ore needs to remain below $100/t for long enough to trigger a sufficient supply response to re-balance the market. (GOLDMAN)

Only 1% of steel mills are profitable which points to far more downside in iron ore.

Other commodities also look set to fall in price as China slows such as coal, copper etc.

Interest Rate Differentials

The market is looking for 100 bps of cuts from the FED but just 25 bps of cuts from the RBA. Last week RBA governor Michele Bullock said it was too early to think about near-term rate cuts. She noted inflation remains high, needing high rates for longer. Her remarks came despite data showing weak economic expansion in the second quarter. At the same time, Australia’s inflation fell to 3.5% in July, nearing the central bank’s target range of 2-3%. The AUD didn't manage any upside on the above and we have seen it fall back.

We expect at least one cut by year-end and on the other side of the pair the market is too optimistic about Fed cuts - we expect 50 – 75 bps rather than 100 bps. We also expect a 35 bps cut in September rather than a 50 bps cut after NFP data on Friday.

Technical Analysis

The key levels of support and resistance to look out for are below.