Australian Dollar May Fall a “Victim” of Softer PBoC Monetary policy in 1H 2022

Recently, the Fx team of Bank of America published its midterm Aussie forecast. Aussie along with the British pound remain the currencies of choice for many forex traders, so looking into details and explanations may shed light on one of the most acclaimed Fx currencies. Among other interesting things, foreign exchange analysts at Bank of America anticipate an ongoing stalemate between negative and positive drivers that have kept the Aussie in check in the second half of 2021 to extend a while longer.

In order to assess the entire set of pertinent factors, we must keep an eye on Australia’s most significant trading partner, China, where recent turmoil engulfing building construction and insurance sectors (think China Evergrande’s saga) may push the PBoC to maintain a much softer monetary policy than many experts anticipate. The tug-of-war between China’s fight against looming slowdown and RBA policy normalization is likely to be the key for AUD dynamics in 2022, once stripped of USD’s relative strength which is backed mainly by the omicron and Federal Reserve factors.

A slow pace of policy easing in China coupled with the RBA maintaining its dovish guidance underpin negative sentiment in the near term. Looking into 2022, AUD/USD appears to be at the whim of Australia/US interest rate differentials and the US Dollar, while commodities seem to be out of the picture for now. It is the recent change in tack by the Federal Reserve that is driving rates and the demand for US Dollars.

All in all, AUD/USD pair may soften into early 2022 while the Fed remains on track to tighten policy at a faster pace than the RBA. A strong CPI print could see the RBA jump into action in February and this might see AUD/USD appreciate.

In the short run, the USD/AUD has a key resistance level at 1.427–1.428, while its meaningful support level sits near 1.379. Having bounced higher from the lower boundary on Dec. 23, Aussie is now in the light retreat mode looking towards the higher boundary, which it is, however, unlikely to reach per se. That prompts traders to take profits at around ⅔ way of the upward movement.