Market Mantra: Virus woes hurting Australian dollar as market records worst week since January

With housing prices in Australia starting to suffer as a result of lockdown and the Chinese economy slowing down the Aussie is expected to fall further.

Australian shares finished a tumultuous week down 2.2%, its worst week since January 29, as gold stocks and miners took a hit.

Australian miners shed 11.3% for the week, with BHP leading the losses. BHP, the world’s biggest listed miner posted a weekly loss of 16%, its worst week since March 2020 as investors digested news regarding the company’s decision to end its UK dual listing.

The sell-off in iron ore is expected to continue as concerns of steel demand from China weigh on the sentiment. The market has been hit with the closure of steel mills in China as authorities aim to reduce emissions from the sector. With steel production in July down 84% compared to the same time last year there is fear this could further accelerate the fall in mining stocks.

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Iron ore is now deeply in the bear market has fallen 43% from its peak in May.

Image source: mines.gov.in

Investors have also been concerned about the rise in coronavirus cases in Australia. Australia’s third wave of COVID-19 infections shows no signs of slowing down and have pushed the world’s 13th largest economy to the brink of its second recession in as many years.

Sydney Airport’s half-yearly results were a testimony of damage done by the continuing pandemic. Australia’s biggest airport operator recorded a net loss of $97.4 million for the six months ended 30 June. This was significantly greater than the $52.6 million loss it announced last year.

The airport did not pay any dividend and as per Citi analysts, the dividend will be suspended until June 2022 due to slower than expected recovery from the pandemic. Sydney Airport’s international traffic was also down 91% in the first half of the year compared to the same time last year.

Many analysts, however, believe that the market is now desensitized to the virus woes and the attention is more focused on US Federal Reserve’s tapering talks. Minutes from the Fed’s July meeting showed officials discussing ceasing back on unprecedented economic stimulus by year’s end.

While there are some divisions among Fed officials over the economic impact of increasing coronavirus cases, the minutes solidified expectations that the Fed will step back on stimulus before year’s end barring some unpleasant economic surprise. This week investors will be keeping a keen eye on Fed Chair Jerome Powell’s speech at Fed’s annual research conference for clues on Central Bank’s next steps.

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Gold was little changed this week, as it battled with the rising US dollar. The economic concerns over a global pandemic slowdown due to a spike in COVID-19 infections underpinned the yellow metal’s safe-haven status, a stronger US dollar on the other hand curbed any gains in the precious metal.

With recovery from coronavirus pandemic starting to see drags as Delta cases rise globally, gold investors have underlying support. Having said that with US Dollar also rising with expectations that the Fed will move towards tapering, it has been made gold more expensive for other currency holders.

As such gold investors will be keeping an eye on Fed’s annual get together this year, which could shed further light on monetary strategy and timeline. As per analysts from Commerzbank, “As soon as Fed announces that it will start to reduce its bond purchases, an important obstacle for the gold price should disappear. During the further course of the year, it should benefit from the comparatively cheap valuation of gold and the record low real yields.”

The concern that the rising COVID-19 cases globally could handcuff international travel continued to weigh on the oil markets. Brent Crude fell by 9% for the week and US Crude oil ended the week more than 8% down. Overall, oil recorded its biggest losses in more than nine months.

Several G20 countries have now reimposed numerous measures including steep travel restrictions in a bid to reduce the spread of the virus. In addition to that China, the world’s largest importer of oil had reimposed tighter restrictions at the port as part of its zero-tolerance policy against the pandemic leading to widespread congestion, while both Australia and New Zealand have also stiffened restrictions.

With global air travel demands also reducing in tandem the black gold fell to its lowest levels since mid-April as oil investors have realised that the Delta variant is a growing problem and a potential hurdle to any recovery in oil demand.

Regarding the Australian Dollar, the rising coronavirus cases took a toll on the local currency as it fell against all major peers. In comparison to the US Dollar, the Australian Dollar fell 3% to a 10-month low of 0.71265. With lockdown further extended in Sydney and State governments in Australia keen on locking everything at the drop of a hat it continues to work against Australian growth.

With housing prices in Australia starting to suffer as a result of lockdown and the Chinese economy slowing down the Aussie is expected to fall further. Having said that there may be investors who are likely to think that the market is oversold at this stage and provide some support for the Aussie.

Market Mantra: Representative Picture; ; Image Source: @CANVA
Market Mantra: Representative Picture; ; Image Source: @CANVA

However, we expect that any bounce from these levels will provide further opportunities to short the Australian Dollar. As such traders are best to serve to wait for the bounce and start shorting at first signs of exhaustion as we expect the Australian dollar to suffer strongly at this point against the greenback.

Investors will keep a keen eye on the 0.70 marks as that area has provided strong support before and is regarded as big psychological importance. A break below 0.70 against the US Dollar will almost certainly result in a further collapse of the Australian Dollar shortly.

Regarding the Indian Rupee, a fall in oil prices helped stabilise the Indian currency against most major currencies. While a move towards haven resulted in the Rupee falling against the US Dollar, the Rupee rose against all other main currencies such as Euro, Pound and Aussie Dollar. Even though major INR traders are betting Rupee will fall in near future, there are stronger bets of a rise in INR against the Euro and Australian currency soon.

In the world of Cryptocurrencies, Bitcoin went about its business as usual to record a fifth weekly gain. The bulls continued to rally as they look set to take over another key Fibonacci level, the 61.8% of the $64,895-$28,600 mark at $51,030.

It was however clearly the week for the altcoins. With Bitcoin rising 5.67% for the week and Ethereum rising only 0.03%, other currencies stole the show.

We have been bullish in Cardano and Polka Dot over the past two weeks and both of them did not disappoint. Cardano spiked 17.47% for the week whereas Polkadot rallied as much as 23.02%. In fact, Cardano overtook all other altcoins to now become the third highest cryptocurrency after Bitcoin and Ethereum based on market capitalisation. This is mostly thanks to its upcoming Alonzo upgrade, which will incorporate smart contracts and is expected to give stiff competition to Ethereum.

In agricultural products, the old trading saying “nothing of importance happens in the grain markets in the last in the last two weeks of August,” rang true this week with long liquidations across nearly all agricultural commodities.

With the US dollar rising strongly against all other currencies the grain markets struggled with broader profit-taking as inflation anxiety’s continued to wane. The stronger US Dollar has pressured all commodities and with China demand estimates reducing the uncertainties are working to tip the prices of agricultural products further down. Having said that the Northern Hemisphere is battling one of its worst drought conditions in a long time and with questions around production supplies anything is possible in this market environment.

Author: Ateev Dang is a trader and trading coach by profession. He runs a business called Glow trades Pty Ltd where he teaches anyone interested in starting their trading journey how to trade. He can be contacted at adang@glowtrades.com.au.


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