Fundamental Forecast for Australian Dollar: Bearish
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- AUD/USD Classical Technical Report 08.12
In an unprecedented volatile week in financial markets, massive swings in risk sentient witnessed the rise and fall of global equity markets as investors reacted to a host of economic concerns. The Australian dollar plummeted as sharp sell-offs around the world saw traders jettison so called “risk currencies” in favor of haven plays into the swissie, the yen, and the dollar. However a rebound in stocks during the later part of the week saw the Aussie pare some of the steep declines on renewed hope that the Fed’s extended zero rate policy will avert a slide back into recession and that European leaders will be able to find consensus on a way to stem further contagion of the debt crisis that has sapped confidence in the region.
The Aussie fell 0.9% against the greenback this week, with the antipodean currency plummeting nearly 3% against the yen as investors shunned risk after rating agency Standard and Poor’s downgraded the US debt rating from the coveted AAA to AA+ with a negative outlook. The news coupled with ongoing concerns about the threat of contagion in Europe, sparked a massive sell-off in risk as investor confidence took a sharp dive. Adding to market jitters were remarks made by central bank officials from the Swiss National Bank and the Bank of Japan, both of which warned that policy makers were closely eyeing the rapid appreciation of the their respective currencies. SNB Vice President Thomas Jordan went as far as to say that considerations were being made to possibly temporarily peg the franc to the euro to stem the swissie’s rise. And while we find this solution highly improbable, market participants flocked away from the franc on the prospect, boosting haven flows back into the dollar and the yen.
Economic data out of the Australia this week contributed to the aussie’s decline as a flurry of weaker than expected prints on home loans, investment lending, employment data, and consumer inflation expectations weighed on interest rate prospects, fueling speculation that the RBA will need to move in to keep the economy afloat. Home loans posted zero growth m/m in June while investment lending and employment actually contracted. Credit Suisse overnight swaps are now factoring in more than 141basis point in interest rate cuts over the next twelve months. With Australia boasting the highest interest rates of the developed economies, its appeal to investors in search of yields may continues to ease as markets have already priced in a 25 basis point hike at the next RBA policy meeting. The economic docket for Australia is relatively quiet next week, with no data of note save the minutes from the August 2nd RBA policy meeting on Tuesday. Traders will be closely eyeing the minutes after last week’s dismal data for the central bank’s growth outlook for the continent nation.
The AUD/USD pair broke below lower-bound trendline support of an ascending channel dating back to June of 2010 before rebounding off the 38.2% Fibonacci retracement taken from the ascent off that low. The convergence of downward sloping 20, 50, and 100-day moving averages suggest the aussie’s may yet see further weakness. The pair failed four attempts at a breach the 23.6% retracement at 1.0360 where interim resistance now stands. A topside break sees subsequent ceilings at 1.0440 and the 1.05-figure. A break below interim support at 1.0170 eyes downside targets at parity backed by the 38.2% retracement tested earlier this week at 0.9925. Aussie price action will largely be determined by broader market sentiment as fears of a possible downgrade of French debt, ongoing fears of European contagion, and global growth concerns weigh on risk appetite. –MB
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