In March, the Aussie dollar, often seen as an underdog in the currency world, showed some promise against the US dollar. However, it lost ground in the latter part of the month. Let’s take a closer look at what’s going on with the AUD/USD pair and the struggle the Australian dollar may face in the future.
The chart below illustrates that the Australian dollar gained nearly 2.5% against the US dollar at certain points in March. However, by the end of the month, it had retreated to near its starting position. For those keen on staying ahead of economic events that impact the forex market, keeping an eye on the economic calendar, which includes forecasts for similar announcements, is advisable.
However, even with this 0.5% growth, the Australian dollar fared better than other major currencies during the same period. The following chart straightens up the head to the AUD’s outperformance against the US dollar, the euro, the pound, the Canadian dollar, and the New Zealand dollar.
However, when assessing the situation since the beginning of the year, the AUD appears one of the weakest currencies.
While it might seem tempting to interpret last month's performance as a signal for the Australian dollar to rebound, this optimism may not be entirely realistic. The reason is the decisions of the local central bank. On the one hand, the RBA signaled the possibility of increasing interest rates (which may provide additional support to the AUD). But it’s unlikely that the RBA will pursue another hike. However, the inflation rate could prompt the central bank to initiate a rate cut sooner rather than later.
On the other hand, comparing interest rates with other major central banks reveals a discrepancy. With rates in the US at 5.5%, in the UK at 5.25%, in the Euro Area at 4.5%, and in Australia at 4.35%, Australia's rates are lower. Anticipating rate cuts in the US and the UK possibly in June, while Australia may act later in the fourth quarter, the timing difference won't bridge the gap. The RBA won't gain an edge from delaying the start of its cycle.
Moreover, the performance of the Australian dollar is closely tied to the Chinese economy, given China's significant role as a trading partner. The giant Chinese economy is still up in the air, and it doesn’t bode well for the AUD either. Therefore, when the Federal Reserve starts its rate-cut cycle, the AUD’s growth might not be as remarkable compared to the other majors. Nonetheless, it's essential to recognize that the forex market is dynamic, requiring individuals to stay informed and conduct their analysis before making trading decisions.
