AUD/USD: Sideways churn continues even as Fitch revises Australia’s rating outlook to negative

  • AUD/USD lacks a clear directional bias despite Australia’s outlook downgrade by Fitch. 
  • RBA’s reduced bond purchases could be helping the AUD avoid losses. 
  • China’s decision to raise its fiscal deficit target may bode well for the AUD. 

AUD/USD is extending its multi-hour range play with sellers refusing to step in despite rating agency Fitch’s decision to cut Australia’s outlook to negative from stable. The rating agency affirmed Australia’s prized AAA rating. 

While Australia’s prized AAA rating has been retained, the outlook has been revised lower citing the impact on the economy and public finances from the coronavirus pandemic. Fitch expects the $2 trillion economy to contract by 5% this year, mainly due to a sharp downturn in the second quarter. The economy is forecasted to begin slow recovery in the second half of 2020. 

So far, however, the news has failed to have a notable impact on the Aussie dollar. The AUD/USD pair continues to trade in the range of 0.6550 to 0.6576, which has been in place since Thursday’s US trading hours. 

The Reserve Bank of Australia has recently winded down bond purchases with the three-year yield steadying near the target of 0.25%. That seems to be the source of AUD’s resilience. 

Looking ahead, the AUD may draw strength from China’s decision to raise the fiscal deficit target to over 3.6% of its gross domestic product this year from the previous year’s 2.8%. Essentially, the dragon nation will be spending more to support the economy. 

However, if the US-China tensions continue to escalate, the risk sentiment will likely weaken, pushing the growth-linked Aussie dollar lower. China’s Premier Li was out on the wires a few minutes before press time asserting that his government will resolutely oppose and deter any separatist activities seeking Taiwan independence. Li’s comments come on the heels of the US decision to sell $180 million worth of arms sales to Taiwan.

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