Australian Dollar Outlook Weighed By Interest Rate Expectations

Australian Dollar Outlook Weighed By Interest Rate Expectations

Fundamental Outlook for US Dollar: Bearish

• Australian Business Investments Falter in Second Quarter
• 2Q Construction Expands at Slower Pace
• Dollar’s Safe Haven Status at Risk Exposing Failing Growth, Rates

The Australian dollar pared the decline from the previous week, with the exchange rate rising to a high of 0.8986, but the AUD/USD may push lower going into the following month as investors scale back speculation for a rate hike in September.

At the same time, concerns budding from results of the national election may continue to drag on the economic outlook as it failed to generate an outright majority for the first time in 70 years, and qualms surrounding the prospects for future policy could push price action back below the 200-Day SMA (0.8943) as the short-term rally fails to break above the 20-Day SMA at 0.9009. As a result, the head-and-shoulders top at the August high (0.9221) may continue to pan out in September, and the aussie-dollar may work its way back towards the 23.6% Fib retracement of the 2008 rally to the 2009 high, which lies around 0.8600.

A Bloomberg News survey shows all of the 23 economists polled forecast the Reserve Bank of Australia to keep the benchmark interest rate unchanged at 4.50% on September 7th, while investors are pricing a zero percent chance for a 25bp rate hike next month according to Credit Suisse overnight index swaps, and the central bank may hold a neutral policy stance throughout the remainder of the year as the outlook for global growth remains clouded with uncertainties. Nevertheless, the economic docket for the following week is expected to reinforce an improved outlook for future growth, and the recent developments could lead the higher-yielding currency to appreciate further against its major counterparts as the region continues to benefits from the expansion in global trade. In addition, the RBA may see scope to normalize monetary policy further over the coming months as the central bank maintains its dual mandate to ensure price stability while fostering full-employment, and hawkish comments from policy makers could park a rise in interest rate expectations as growth prospects improve.

Retail spending in Australia is expected to increase 0.4% in July, paired with a 0.3% expansion in private sector credit, but the biggest market mover of the week will certainly be the 2Q GDP report, which is forecasted to show a 0.9% rise in the growth rate. However, building approvals are projected to fall another 0.7% in July after contracting 3.3% in the previous month, while the trade surplus is anticipated to narrow to AUD 3.1B during the same period from AUD 3.5B in June, and the mixed back of data could lead to range-bound price action in the AUD/USD next week as policy makers maintain a cautious outlook for the global economy. - DS