Australian Dollar Vulnerable As Double Dip Talk Surfaces

Australian Dollar Vulnerable As Double Dip Talk Surfaces

Fundamental Outlook for US Dollar: Bearish

• RBA’s August minutes reveal policy makers see rates “appropriate”
• Average weekly wages rose 0.8% in the second quarter, the lowest in nearly four years
• Westpac leading index printed flat in June, which was the first non-positive result in a year.

The Australian dollar was virtually flat on the week as it took its cue from ebb and flowing risk trends. An increase in merger and acquisition activity and more positive corporate earnings had bulls out early in the week before weak U.S. fundamental data sparked concerns over a double dip recession in the world’s largest economy. The minutes from the RBA’s August meetings diminished yield expectations influence on price action. The central bank has taken the view that rates are currently appropriate which has markets forecasting that policy makers will remain on hold through the end of the year. A flat print in the Westpac leading index and the lowest wage growth in nearly four years supported the monetary authority’s outlook adding to the bearish case. Aggressive tightening at the end of last year has started to cool the export driven economy which could remain a weighing factor for the com-dollar.

RBA Deputy Governor Ric Battellino isn’t sharing the growing dour outlook for the Australian economy as he expressed concern over consumer prices going forward. The policy maker stated “history tells us that inflation can be a problem during resources booms, and while there are grounds for thinking it will be less of a problem this time than in the past, we need to remain alert to the risks.” The committee member also expressed surprise that manufacturing has held up as well as it has and with a shortage of workers-wage inflation could accelerate if growth continues. Battellino also showed little concern for a double dip recession in the U.S. given that they are rare and he sees growth continuing despite losing some momentum.

The high yielding currency could see renewed support if participants adopt the Deputy Governor’s views as the current flight to safety could be viewed as a bit overdone, opening the door for a retracement of recent Aussie losses. However, if fundamentals in developed economies point toward a broader slowdown, then the current flight to safety could continue dragging the commodity dollar lower. An empty economic calendar will give even greater weight to broader trends, with only the Conference Board leading index on tap. The AUD/USD has bounced twice from the 100-Day SMA at 0.8843 which adds validity to the technical indicator as a support level. Therefore, upside potential could exist despite fundamentals pointing toward additional losses. However, a break below exposes downside risks to 0.8632-7/19 low. - JR