The focus in Australian Dollar trading falls squarely on the Reserve Bank next week, with expectations calling for Glenn Stevens and company to reduce borrowing costs by 50 basis points. However, recent data may open the door for a less aggressive posture.
Australian Dollar May Rise on Risk Appetite, Smaller Interest Rate Cut
Fundamental Outlook for Australian Dollar: Bearish
- Retail Sales, Private Sector Credit offer surprise improvements in August - Australian Trade Balance issues the second-largest trade surplus ever as exports boom - TD Securities Inflation rises for 12th consecutive month in September
The focus in Australian Dollar trading falls squarely on the Reserve Bank next week, with expectations calling for Glenn Stevens and company to reduce borrowing costs by 50 basis points. However, recent data may open the door for a less aggressive posture. Last week saw the Trade Balance swing sharply into positive territory in August, issuing a A$1.36 billion surplus versus a –A$717 million deficit in the preceding month. The uptick came courtesy of a 6% rise in exports driven by coal and iron ore shipments. Chinese demand for Australia’s mining goods has remained resilient for the time being, allowing for continued expansion in the sector which has driven unemployment to record lows. This has propped up disposable incomes and supported consumption growth even as things look increasingly bleak elsewhere in the developed world. Indeed, Retail Sales topped expectations in August to print at 0.3% (versus 0.1% forecast) while Westpac’s measure of consumer confidence rose nearly 17% in the last two months. Such signs of resilience could point to a smaller cut of just 25 basis points this time around. The passage of the $850 billion financial market rescue plan by the US Congress also supports a more restrained approach: should the plan indeed offer relief to credit markets, the current bottlenecks in borrowing will begin ease and allow the RBA to boost liquidity at a more measured pace.
That said, China will not go unscathed as demand its main overseas partners in the US, Europe and Japan slow down. This would surely see the Asian powerhouse re-examine its wanton splurging on Australian coal and iron ore, taking the wind out of the sails of the mining sector. To that effect, the long-term outlook points to 150 basis points in rate cuts over the course of the next 12 months.
On balance, the Australian dollar could see room for a near-term rise next week. A shallower-than-expected interest rate cut coupled with potentially normalizing risk sentiment following the affirmative vote on the US rescue plan could open the door for the antipodean currency to correct higher having lost 7.8% against its US counterpart this week. However, we maintain that the long-term fundamental outlook remains firmly bearish. - IS