Australian Dollar Likely to Fall Further Against US Dollar

Australian Dollar Likely to Fall Further Against US Dollar

Fundamental Outlook for Australian Dollar: Bearish

• Australian Dollar drops below parity amidst downgrade in interest rate forecasts, ‘risk’ sell-off
• DailyFX Strategist establishes Australian Dollar short following employment report

The Australian Dollar lost its status as currency world darling in a mere week’s time, falling sharply as the worst G10 performer through Friday’s close. An impressive midweek Australian Employment Change report generated plenty of light but no heat, failing to drive the Australian Dollar higher. In fact traders punished the previously high-flying currency on a material downgrade in Reserve Bank of Australia interest rate forecasts. Overnight Index Swaps now predict that the Reserve Bank of Australia will leave interest rates unchanged through the coming 12 months—a noteworthy shift from previous calls for up to 50 basis points in additional rate hikes. On balance, it seems that the Australian Dollar tide has turned and there is risk of considerable downward correction in the weeks ahead.

A relatively empty week of Australian economic event risk means that the Aussie Dollar will look to broader financial markets for cues. The major exception will be the release of minutes from the Reserve Bank of Australia’s November meeting due Monday night/Tuesday morning at 00:30 GMT. The RBA surprised traders in raising its Overnight Cash Rate by 25 basis points at said meeting, and it will be interesting to read into the thought process that went into the rate decision. A relatively balanced tone in the statement that followed the announcement suggests that the minutes will be similarly uneventful, but traders should be on the lookout for any surprising rhetoric.

From a medium to longer-term perspective, the Australian Dollar remains considerably overbought against its US namesake. We have argued for quite some time now that extremely one-sided AUDUSD positioning warned that a turnaround was near. Yet sentiment and positioning can remain extreme for extended periods of time, and that remained the case as the pair charged to fresh highs. Now with concrete signs of reversal, we feel that the Australian Dollar may continue to correct lower as traders shed their one-sided speculative longs. - DR