aud fundamentals

Australian Dollar May See Extended Losses On Weak Inflation Data

Saturday, 24 January 2009 02:57:52 GMT  |  John Rivera, Currency Analyst

The Australian dollar dropped over 400 pips on the week as troubles in the U.S. and U.K. banking systems fueled risk aversion and led to the unwinding of the carry trade. Fundamental data for the country didn’t help sentiment as consumer confidence fell for the first time in three months by 2.2% as the contracting economy is weighing on the labor market.

Australian Dollar May See Extended Losses On Weak Inflation Data

Fundamental Outlook for Australian Dollar: Bearish

- The TD Securities Inflation Index fell to 2.2% from 3.0% on a yearly basis, after a 0.2% decline in December
- The Westpac Consumer Confidence report reported a 2.2% decline in sentiment on recession concerns and job losses

The Australian dollar dropped over 400 pips on the week as troubles in the U.S. and U.K. banking systems fueled risk aversion and led to the unwinding of the carry trade. Fundamental data for the country didn’t help sentiment as consumer confidence fell for the first time in three months by 2.2% as the contracting economy is weighing on the labor market. The global economy saw more signs of slowing with the U.K. falling into a recession and China growth slowing to 6.8% in the fourth quarter. The slowdown in China signals an end to the mining boom for the Australia which has been a main driver of growth. It estimated that the impact on exports could be as high as 5 billion dollars. The IMF is expected to lower the country’s growth expectations for 2009 to near zero from 1.8% in November. 

The economic docket will provide significant event risk in the form of NAB business confidence and consumer prices. Business sentiment has held near record lows and may have deteriorated further as the outlook for growth continues to decline. Meanwhile, inflation is expected to have slowed to 3.6% in the 4Q due to falling oil prices and a slowing economy. This will give the RBA the green light to continue lowering interest rates as they try and prevent the economy from falling into a recession. The central bank aggressively cut rates to a six year low of 4.5% in December and is expected to slash it by another 50 bps in February. However, giving the deceleration of growth in Asia we could se a deeper than expected cut and if interest rate expectations decline it could lead the Australian dollar to trade lower.  A possible test of the November 21st low of 0.6333 is not out of the question. However, if the numerous stimulus and bailout packages announced across the globe boost risk appetite then we could see flows target higher yielders like the Australian dollar pushing it toward the 50-day SMA at 0.6700. - JR

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