AUD/USD: Australian dollar hasn’t been this overbought since January

The Australian dollar is the best-performing currency in the developed world in the past few weeks. The AUD/USD pair has risen by more than 8.5% while the AUD/EUR and AUD/GBP have gained by 5% and 7% respectively. As a result, the currency has become a clear gauge of the post-coronavirus recovery.

China recovery

China is the most important country for Australia. It is the sixth-biggest trading partner for the second-biggest economy in the world. As a result, the country exports more than two-thirds of its goods to China. This includes more than $79 billion worth of iron ore, $13.6 billion worth of coal, and $16 billion worth of natural gas. Indeed, in 2018, Australia exported goods worth more than $125 billion to China.

Similarly, Chinese are among the biggest consumers of Australian services, including education and entertainment.

In recent weeks, data from China has been relatively positive. On Monday, data from Caixin showed that the manufacturing PMI rose to 50.5, a sign of growth. Another data released yesterday showed that the services PMI rose to 55 from the previous 44.4.

Last month, data from the Chinese statistics office showed that China’s exports grew by 3.5% in April while imports fell by 14.2% from a year ago. These numbers were better than the previous month.

And it seems that Chinese have gone back to work. According to Bloomberg, oil consumption in the country has gone back to pre-coronavirus levels.

Most importantly, exports from Australia have been rising. A report released in May showed that iron ore imports had risen by more than 13%.

In all, a resurgence China has been positive for the Australian dollar (AUD/USD) because it has increased the demand for the Aussie.

Weaker US dollar

The Australian dollar has also strengthened mostly because of the weaker US dollar. In the past few weeks, the US dollar indexhas dropped by almost four per cent. As I wrote yesterday, this decline is mostly because investors and businesses are now moving to local currencies as economies reopen.

The concept is relatively simple to grasp. As the coronavirus pandemic spread, demand for the US dollar rose because people were afraid of their local currencies. They moved to the USD because of its role as the world reserve currency and the stability of the US economy.

Today, many countries are reopening and there are hopes of a coronavirus vaccine. All this is reducing the demand for the US dollar, pushing it lower.

Furthermore, the ongoing protests, the deterioration of the US economy, and the talk of negative rates has not helped.

AUD/USD soars because of a less dovish RBA

Finally, the Reserve Bank of Australia has been the least dovish central bank in the developed world. As other central banks boost their asset purchases, the bank has tapered on its purchases. When making its interest rate decisionthis week, the bank said that it had stopped making more asset purchases.

Other banks are saying the opposite. In the United States, the Federal Reserve is in an open-ended quantitative easing program, which has pushed its balance sheet to above $7 trillion. In Europe, the ECB announced that it was boosting its asset purchases by 600 billion euros. Meanwhile, in Japan, the BOJ has continued to print money while in the UK, the BOE is considering negative rates. All this make the Australian dollar more attractive.

AUD/USD technical outlook

On the daily chart, the AUD/USD pair is in its sixth straight day of gains. It is above the 100-day and 50-day exponential moving averages while the RSI has soared to the overbought level of almost 80. This is the most overbought it has been since January 2018.

At the same time, the price is slightly below the important resistance level of 0.7000. Therefore, while the AUD/USD pair may continue to rise, there are more risks of buying it now than the potential rewards.