Why the ASX 200 crashed 3% on Friday and AMP’s AUD/USD outlook

We examine why the local benchmark plunged during Friday’s session as well as briefly examine AMP’s outlook for the Australian dollar over the next six to twelve months.

ASX 200 follows Wall Street lower on Friday

The ASX 200 benchmark collapsed on Friday – finishing out the session 3.06% or 187 points lower – following a brutal session in US markets overnight.

In a pullback that many have argued is well overdue, US markets plunged steeply during Thursday’s session – with tech stocks leading the losses. The Dow Jones Industrial Average fell 2.78% to 28,292 points; the S&P 500 benchmark dropped 3.51% to 3,455 points; while the tech-heavy Nasdaq 100 crashed a staggering 5.23% – to finish out the session at 11,771 points.

Speaking of these market moves, IG Market Analyst, Kyle Rodda said:

‘The US stock market, and especially US tech-shares, were due a corrective move. It’s a dynamic that could persist in the market for several days, if not a little longer now, before the market returns to its primary uptrend.’

Unsurprisingly, as noted at the start, the ASX 200 followed Wall Street lower on Friday – with the benchmark finishing out the week firmly below the 6,000 point level – at 5,925 points (-3.06%).

‘The ASX200 has been hammered today, just as expected. Wall Street’s pullback had us set for relatively substantial losses today, and the market has run further to the downside than what had been implied in futures markets this morning,’ Mr Rodda explained after the market close.

Indeed, looking to fully replicate the US experience, the majority of the worst performing local equities were tech stocks, with WiseTech, Afterpay and Appen some of the biggest losers from the session.

Despite today’s share price weakness – with a longer-term view in mind – analysts from AMP Capital recently argued that the Australian share market will 'probably not' continue to lag its global peers, pointing out that:

'As the global economy recovers and interest rates bottom this will likely benefit cyclical sectors and financials and hence see non-US, including Australian shares, outperform. More money printing probably also helped in the US, but this will eventually slow.’

Australian dollar (AUD/USD) outlook: the bull case

Moving away from equity markets, with a view that commodity prices will continue to rise amidst a weaker USD, analysts from AMP Capital this week said they expected the Australian dollar to trend higher in the short term.

‘We expect the trend to remain up in the $A towards $US0.80 on a 6-12 month view helped by rising commodities and a return to a positive interest rate differential versus the US,’ analysts from AMP mused.

The Australian dollar has indeed risen strongly in the last couple of months – boosted by iron ore prices trading around multi-year highs – gaining from below $0.70 at the start of July, to last trade at around $0.72.

At its 52-week low the AUD/USD traded below $0.60.

AMP’s view mirrors that of Macquarie Wealth Management, with the investment bank in early August postulating that ‘In a scenario where the CRBRI [CRB Raw Industrials Index] rises 20% off the low (which is a modest upcycle), the implied AUD/USD is $0.80.’

Mind you, while the Aussie dollar has risen solidly over the last few months, it has pulled back modestly in the last few days amidst elevated levels of volatility – retreating from an intraday high of $0.74135, recorded on 1 September.

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