Australian dollar bounces back, breaks past 72

Australian dollar rebounds after slide

The Australian dollar has shown strong volatility of late. Last week, the Aussie fell 3.1%, as weak risk appetite and hawkish FOMC minutes propelled the US dollar sharply higher, especially against risk currencies like the Australian dollar. However, the greenback rally has run out of steam and AUD/USD has bounced back with gains of 1.45% this week, recovering about half of last week’s losses. The Australian dollar has benefited from an improvement in risk appetite this week, as China has successfully contained the latest Covid outbreak.

The week started with Australian PMIs for August, and the results were underwhelming. Manufacturing PMI slowed to 51.8, down sharply from 56.8 a month earlier. This is just above the neutral 50-level and points to very weak expansion. The services sector is in worse shape, with two successive readings in contraction territory. The August read fell to 43.3, down from 44.2 points. The downbeat PMI reports are a result of the lockdowns which have been imposed across much of Australia due to a spike in Covid infections. The outbreak has centered around the state of New South Wales, which prompted the state government to extend the lockdown in Sydney to the end of September. The move could push Australia’s weak economy into recession, which in turn would sour sentiment towards the Australian dollar.

The Australian dollar has managed to move higher this week, despite the weak PMIs. However, if upcoming economic data underperforms, these gains could be short-lived. The RBA will have little reason to tighten its bond purchase programme, let alone contemplate rate hikes, until the economy shows significant improvement.

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AUD/USD Technical

• AUD is testing resistance at 0.7225. Above, there is resistance at 0.7306
• On the downside, the next line of support is at 0.7103.

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