Australian Dollar to Fall on Diminishing Rate Hike Expectations

Australian Dollar to Fall on Diminishing Rate Hike Expectations

Fundamental Forecast for Australian Dollar: Bearish

• Aussie Dollar Crosses Offer Attractive Setups Away from EU Crisis and US Ratings
• Aussie, Kiwi Gain After Better-than-Expected Chinese GDP
• Relative Aussie Strength Still in Question

The Australian Dollar had a particularly disappointing week, losing ground against every major currency, as it fell the most against the safe havens, down 3.61 percent against the Swiss Franc, 2.88 percent against the Japanese Yen, and 0.96 percent against the U.S. Dollar. Broader market sentiment took hold of the antipodean currency this week, as the Aussie sports the highest overnight benchmark interest rate among the major currencies; with the debt crises ramping up in the Euro-zone and the United States, market participants sought have away from risky assets such as the Australian data.

In terms of data that was released this past week, a batch of mixed reports did little to help the currency that is viewed as a barometer of broader risk-appetite in the capital markets. The credit and housing markets remained relatively stable in May, data showed this past week, with home loans up 4.4 percent, though slightly lower than the 4.5 percent estimate, according to a Bloomberg News survey. In what was the most disappointing print of the week, however, was the National Australia Bank Business report, which despite showing an increase in conditions from 1 to 2 in June, confidence dropped significantly, down to 0 from 6. Similarly, Westpac, one of Australia’s “big four” banks, released a report suggesting that the Reserve Bank of Australia would need to cuts rates in the coming months in order to boost growth in non-mining sectors, which have struggled in recent months.

Looking forward to the week ahead, the Australian Dollar is likely remain under heavy selling pressure, as the Euro-zone crisis appears to only be worsening at this point, with Italy and Spain in the market’s crosshairs, while the negotiations as to raise the debt ceiling or not appears to be reaching a significant impasse, with both Democrats and Republicans alike digging deeper into their positions.

The most important release of the week comes on Monday, as the Reserve Bank of Australia is expected to release the minutes from their July policy meeting, which, as noted by the Westpac estimate, could show a more dovish tone among policymakers as growth appears to be cooling in the antipodean nation. Business confidence is likely to show this as well, with the NAB reading for the second quarter due on Wednesday. As noted earlier, however, the Australian Dollar serves as a proxy to risk-appetite in the markets, so as the crises on both sides of the Atlantic worsen, the Aussie could continue to depreciate against its other major counterparts. -CV