Will the AUD drop with USD?

As consensus amongst analysts grows on the prospect of a progressively weaker USD and stronger gold price, the elephant in the room for locals is of course the AUD in those pairs.  Last night gold rose again hitting $1874 before settling at a still higher $1870, up $70 in just the 2 weeks since it broke through $1800.  However in AUD terms last night actually saw gold drop nearly $5 to $2400 as the AUD strengthened against the weaker USD.

The USD is measured either directly against other currencies or more commonly through the USDX or DXY against a basket of currencies (Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona) with the Euro the heaviest weighting at over 55%.

The gold ‘spot price’ is normally quoted against the USD but in terms of its convertible value the local currency is more relevant.  The stronger the AUD (measured against USD) the lower (relatively) the price of gold here.  And so whilst a weakening USD is normally bullish for gold, the USD denominator in the AUD/USD equation can raise the AUD and decrease the gains in local gold.

However in a financial ecosystem where everything is relative, there is no direct link between a lower DXY and a higher AUD.  The DXY may weaken predominately against a resurging EUR for instance as the Eurozone bounces out of COVID and the ECB stimulates less compared to the Fed.  Against this Australia is then at the mercy of the strength of the Chinese economy, our relationship with China and the RBA’s actions.

On Monday we saw an alarming decline in China’s economy.  April’s print saw industrial production growth easing to 9.8%, down from 14.1% in March and fixed asset investment slowing to an annual rate of 9.9% following growth of 18.3% in March.  Maybe more concerning is the pullback in household consumption with the annual rate of real retail sales growth nearly halving to 15.8% in April following growth of 33% in March or 5% month-on-month in April following monthly growth of around 8.0% in March.

Perhaps more relevant for Australia is Chinese construction, in particular that using steel and hence our iron ore.  The data showed a 10% fall from 2019 levels over the last 4 months (the worst since 2013-15) after the so called “three red lines” policy reigned in leverage from Chinese developers after the world’s most indebted property developer, China’s Evergrande nearly went down and sent shockwaves through markets.  Seven more of the 10 most-indebted developers are also based in China and the policy looks now to be taking effect.  The iron ore price which is currently funding our nation too has been on a sharp decline of late.  Ore is still lagging the falls in steel and hence more downside looks likely.  Less support from ore and signs now of the Aussie property boom logically softening will inevitably mean more needed from the RBA, one of the very few central banks already employing yield curve control, adding another drag on the AUD.  This too is before considering the worsening political tensions between Australia and China and what impact that may have.

And so, whilst a weaker USD often translates to a higher AUD, relativity means it may not be ‘direct’ and possibly the 2 might both fall against the global basket