By HY Markets Forex Blog

The AUD/USD dropped to a fresh 7-month low on Monday, Sept. 29, after declining during the last few weeks.

AUD/USD plunges to 7-month low
The currency pair fell to 0.8754 at 07:00 Australian Eastern Standard Time on Monday, after reaching 0.8766 on Friday, Sept. 26, the Australian Associated Press reported. On Friday, the Aussie struck its lowest since February.

Aussie drops after strong US data
The Australian dollar depreciated after government data showed the nation’s economy growing more quickly during the second quarter than previously thought, according to the news source. The figures, provided by the Commerce Department, indicated the country’s gross domestic product expanded at an annualized rate of 4.6 percent in the three-month period, compared to the prior estimate of 4.2 percent.

This data marked the sharpest quarterly growth since the final four months of 2011, and was released at a time when various reports are painting a picture of robust business conditions in America, Reuters reported. Figures provided for housing, manufacturing and trade activity grant evidence that the previous economic momentum has not let up.

Exports – which grew an 11.1 percent annualized rate in the second quarter – combined with rising business inventories to help fuel the robust improvement in gross domestic product, according to the media outlet. Companies built up $84.8 billion worth of inventory during the period, compared to the prior estimate of $83.9 billion.

GDP report fuels dollar rally, says expert
Bank of New Zealand strategist Kymberly Martin commented on the robust economic growth figures when speaking with AAP, asserting that they helped contribute to the greenback rising relative to all major currencies.

“Broad U.S. dollar strength was the key theme on Friday night,” she told the news source. “The U.S. dollar appeared to gain the upper hand after the release of the most recent reading of second quarter U.S. gross domestic product.”

Slowing Chinese growth
Economic growth in China has been cooling off, and Lou Jiwei, China’s finance minister, stated on Sept. 21 that the nation’s government plans no major changes to stimulus after figures ranging from retail sales to factory production showed stalling activity, according to Bloomberg. For example, National Bureau of Statistics data showed new-home prices falling in 68 of 70 cities in August.

Jiwei’s remarks eliminated speculation the Chinese government will announce new policy measures to stimulate the economy, The Wall Street Journal reported. Commodity markets plunged after these statements, and this development affected the value of the Australian dollar, market expert Martin Schwerdtfeger told the news source.

“Australia is one of the countries among all commodities exporters that has the highest exposure to China, in terms of exports and the general trade linkages between the two countries,” Schwerdtfeger, FX strategist at TD Securities, told the media outlet. He emphasized that China’s finance minister impacted commodity prices.

In these economic conditions, the Reserve Bank of Australia might cut its benchmark interest rates, which have already dropped to a low of 2.5 percent. Further reductions in these borrowing costs could cause the AUD/USD to plunge another 20 percent, Roubini Global Economics wrote in a recent report.

Impact of Federal Reserve
While some are weighing the possibility the RBA will lower its borrowing costs, many market participants are speculating on when the Federal Reserve will bolster its key interest rates. Global investors have been scrutinizing the statements given by Fed officials to get a better sense of what timeline the central bank will use.

In addition, the Fed is almost finished tapering its bond purchases. The central bank bought $85 billion worth of debt-based securities per month between late 2012 and the end of 2013. In January, the financial institution lowered this pace to $75 billion and continued to reduce the amount over time. These monthly purchases have almost reached zero.

In recent years, fund managers have sought out opportunities in Australia due to the nation having higher interest rates than Europe, U.S. and Japan, according to The Wall Street Journal. This development has helped support the value of the Aussie relative to other currencies.

The emerging-market currency could run into some headwinds as the difference between interest rates in the U.S. and Australia dwindles, the media outlet reported. Since carry-trade strategies depend on having a stable interest-rate differential, they will lose some of their appeal if the difference between interest rates on the Australian and U.S. dollars falls.

Investors have already started to unwind their long bets on the Aussie, Elsa Lignos, senior FX strategist at RBC Capital Markets, told the news source.

Market participants interested in forex trading might benefit from learning about the AUD/USD’s recent drop to a seven-month low, as well as the developments that could possibly extend these losses.

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