NEW YORK (TheStreet) -- The massive rally in the Australian dollar since the end of 2008 has taken a major turn in recent weeks, and a confluence of fundamental factors (both internal and external) suggest that this bearish run will continue.Price moves in currencies tend to slow during the summer, but this year has been different, as implied volatility in the AUD/USD has hit highs of 15.5%. In early May, I warned of this potential weakness, so at this stage it is important to revisit the bearish case for the currency to see if these declines can continue. Three separate factors are currently seen moving markets: Unstable credit conditions in China, a possible near-term tapering in quantitative easing stimulus from the US, and the broad expectation that the Reserve Bank of Australia will continue with further interest rate reductions before the end of this year. So while some sections in the market might be looking at recent Aussie weakness as a new opportunity to buy the currency, there is not much in the fundamental picture to suggest a bullish reversal will be seen any time soon.
The other global issue to consider is China, where renewed concerns over the country's troubled credit system have injected additional volatility into trading markets. China is Australia's largest trading partner, as a central location for metals and other raw materials exports. Stock markets in China have seen single-session declines of more than 6% this week, so it is clear that these underlying worries are deep-rooted. Efforts by the Chinese leadership to limit shadow banking practices are at the root of the issue. Shadow banking involves unregulated lending by Chinese banks in China to companies with limited lines of credit. Proposed measures to reduce these questionable (and potentially destabilizing) practices will raise borrowing costs for Chinese companies, cut into manufacturing prospects and reduce demand for raw materials exports in Australia.