The Australian dollar finished marginally higher to end the week’s trade, but the currency’s late reversal suggests that fundamental risks remain to the downside through the near-term.
Fundamental Outlook for Australian Dollar: Bearish
- Australian dollar falls on bearish Chinese GDP data
- Leading Indicator confirms that Australia remains entrenched in recession
- Yet NAB business confidence survey shows signs of hope
The Australian dollar finished marginally higher to end the week’s trade, but the currency’s late reversal suggests that fundamental risks remain to the downside through the near-term. The highly risk-sensitive AUD/USD and the AUD/JPY should have mimicked the approximate 2-3 percent gains in the US S&P 500 and the Australian S&P ASX, but negative developments in Australia limited the impact from improvements in market sentiment. Indeed, traders sent the Aussie lower following news of worse-than-expected Chinese Gross Domestic Product results. Given Australia’s clear dependence on Chinese demand, any slowdown in China’s consumption growth could easily hurt domestic export industries. Broader economic developments should continue to affect the Aussie dollar, while key event risk in the week ahead could likewise drive volatility across AUD pairs.
Quarterly inflation reports and Reserve Bank of Australia minutes will likely drive Australian dollar direction through the coming days. Market forecasts on the future of domestic interest rates remain especially uncertain, and upcoming event risk may go a long way in clarifying outlook for AUD yields. Overnight Index Swaps predict that that RBA yields will remain effectively flat through the coming 12 months—pricing in only 16 basis points of rate cuts. This is at clear odds with negative economic headwinds, but previously hawkish central bank commentary implies that the bank is not necessarily ready to cut rates further. This could all change through Producer Price Index and Consumer Price Index reports, however; consensus forecasts show expectations of sharp declines in annual inflation rates. Surprises in either direction could easily affect interest rate expectations and, by extension, the Australian Dollar itself.
Otherwise it remains important to watch general speculative market trends and implications for the risk-sensitive AUD. The past week saw the S&P 500/AUDUSD correlation fall apart, but it is relatively unlikely that such a shift will be sustained. Indeed, the Aussie remains a relatively high-yielding currency and a prime beneficiary for risky bets. Deterioration in highly fragile market risk sentiment could easily derail the Aussie’s medium-term recovery. – DR
