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Everything is going against the Australian dollar. The list is getting longer and longer and the Aussie, that was somewhat resilient, is beginning to feel the pressure.

QE3 in the US provided the much needed boost for the Aussie, but the failure to break to higher ground can certainly be justified:

There are quite a few reasons for a downwards move:

  • Mining not shining: It’s hard to be 100% sure that Chinese demand is nose-diving, but there are better signs that there is overcapacity in mining. Both reasons cause a plunge in commodity prices. The price of iron ore exports from Australia to China has plunged 38% in the past year. Coking coal fell by a quarter. This is joined by the cancellation of projects and the still ongoing discussion about the “end of the mining boom”.
  • Retail sales fall: The last recorded drop of 0.8% fell very short of expectations. This is another sign that outside the mining sector, Australia’s economy is not at its best.
  • Jobs drop: Also here, expectations for a rise were met with a drop of 8.8K with a downwards revision of previous data.
  • Trade balance deficit grows: The latest trade balance report for August shows a deficit of 2.03 billion, the worst since September 2011. Less global demand for Australian goods also hurts the economy.
  • Rate cuts: The RBA didn’t hesitate and cut the rate to 3.25% at the wake of October. Not everybody expected this, but it couldn’t have been ruled out after everything aforementioned. Australia attracts funds thanks to a perfect AAA rating and a relatively high yield. This yield became lower and the prospects for more cuts will weigh on the Aussie later on.
  • China: One of the most highly regarded indicators, is showing a continued slowdown in China. The HSBC / Markit manufacturing PMI remains in contraction zone: 47.9 points. Add the tension between China and Japan and the uncertainty regarding the regime change, and you get worries for Australia as well. China is Australia’s main trade partner and every piece of economic news from the economic giant moves the Aussie. China releases GDP figures in October. These have a significant impact despite the doubts about the accuracy. A drop below a growth rate of 7.5% could deal a blow to the A$.

In general, the Australian economy still enjoys the past, but the present is worse and the future is full with too much uncertainty. There is a lot of room for the downside.

This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.

Further reading: Australian dollar prediction.