Australian Dollar Rally May Gather Pace As Growth Prospects Improve

Australian Dollar Rally May Gather Pace As Growth Prospects Improve

Fundamental Forecast for Australian Dollar: Bullish

• Aussie Dollar Soars as RBA Upgrades Growth, Inflation Outlook
• Are We at the Verge of a Tentative S&P 500 Plunge and US Dollar Surge?
• Australian Dollar Outperforms Despite Dovish RBA Policy Outlook

The Australian dollar fell back from a fresh monthly high of 1.0199 on Friday as investors scaled back their appetite for risk, but the economic event risks scheduled for the following week could fuel a another short-term rally in the exchange rate as the outlook for future growth improves. The AUD/USD extended the rally from January as the Reserve Bank of Australia raised its 2011 growth forecast in its quarterly report, and speculation for another round of monetary tightening could drive the exchange rate higher over the near-term as investors weigh the prospects for future policy.

The RBA expects economic activity to expand at an annual pace of 4.25% this year amid an initial forecast for a 3.75% expansion, and sees “a strong recovery in the June quarter as coal production picks up and the rebuilding effort gets under way.” In addition, the central bank held a slightly hawkish tone as it anticipates a “gradual increase in wage growth,” and the board may continue to raise its economic assessment over the coming months as the recovery gathers pace. According to Credit Suisse overnight index swaps, investors are pricing at least one more 25bp rate hike for the next 12-months, and interest rate expectations may accelerate going forward as the outlook for growth and inflation improves.

The economic docket for the following week is expected to show retail sales advancing another 0.1% in the fourth-quarter following the 0.7% expansion during the three-months through September, while household spending is forecasted to increase 0.5% in December after increasing 0.3% in the previous month. Moreover, employment in Australia is projected to climb another 20.0K in January, while home loans are projected to increase 1.0% in December after rising 2.5% in the month prior. As private sector activity improves, the batch of positive data could spark another near-term rally in the AUD/USD, and the exchange rate may make another run at 1.0200 as the economic outlook brightens. However, as the region copes with the worst flood in half a century, the natural disaster could dampen the recovery in Australia, and we may see a short-term reversal in the aussie-dollar if the slew of economic developments fails to meet market expectations. - DS