Fundamental Outlook for US Dollar: Bearish
- Australian Dollar extends decline amidst S&P 500 losses
- View our monthly Australian Dollar/US Dollar Exchange Rate Forecast
The Australian Dollar fell sharply amidst similar declines in the US S&P 500 and became the worst-performing G10 currency through the past week of trade. A 3.44 percent decline in the S&P coincided with a broad flight to safety across all major asset classes. Speculative capital subsequently fled the high-yielding AUDUSD and leaves the pair dangerously close to 11-month lows near 0.8100. Whether or not we see continued AUD losses will almost certainly depend on the trajectory of global risky asset classes, while the coming week’s key Employment Change data may likewise produce sharp short-term volatility in the antipodean currency.
A Bloomberg News survey shows that economists believe that the Australian Employment Change report will show anywhere from a 5.0k job loss to a 31.0k net jobs gain. Such a noteworthy spread between the low and high estimate emphasizes market indecision surrounding the release, and whether or not the AUD can regain its ground against its US namesake will partly depend on the result. The Aussie dollar previously saw substantial strength on strong relative economic performance and expectations that the Reserve Bank of Australia would continue raising interest rates. Yet those rate expectations have fallen significantly as RBA officials temper their rhetoric on the future of monetary policy and wait for recent rate hikes to work through the system.
According to Overnight Index Swaps, fixed income traders expect the RBA will raise rates by 20 basis points in the coming twelve months. Said number represents a substantial correction from the 70 basis points priced in following the bank’s May 0.25 percent rate increase. Indeed, the shift likely explains a good deal of the AUDUSD pullback seen through that same stretch. Whether or not we see any improvements in rate expectations will definitely depend on the future of the labor market and other key economic indicator. Suffice it to say, traders should keep an eye on any especially large surprises in Employment Change numbers.
It otherwise remains critical to monitor any and all shifts in financial market risk appetite. Recent S&P 500 losses do not bode well for the Australian Dollar, and continued declines could very well bring fresh lows in the AUDUSD. - DR
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