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Australian Dollar Weakness Ahead As RBA Curbs Rate Expectations

Australian Dollar Weakness Ahead As RBA Curbs Rate Expectations

2011-02-11 21:33:00
David Song, Currency Strategist
Australian_Dollar_Weakness_Ahead_As_RBA_Curbs_Rate_Expectations_body_TOF211AUD.jpg, Australian Dollar Weakness Ahead As RBA Curbs Rate Expectations

Australian Dollar Weakness Ahead As RBA Curbs Rate Expectations

Fundamental Forecast for Australian Dollar: Bearish

The Australian dollar retraced the rally from earlier this month, with the AUD/USD slipping to a low of 0.9960 on Friday, and the exchange rate may continue to trend lower over the following week as interest rate expectations falter. As the near-term rally in the aussie-dollar fails to produce a break above 1.0200, the reversal in the exchange rate should gather pace going forward, and dovish comments from the Reserve Bank of Australia could fuel the bearish sentiment underlying the high-yielding currency as the central bank talks down speculation for higher borrowing costs.

RBA Governor Glenn Stevens said that it was “sensible” to leave the benchmark interest rate unchanged while testifying in front of a parliamentary economic panel earlier this week, and went onto say that the central bank is not contemplating a rate hike at the moment as policy makers expects inflation to stay within the 2-3 percent target range. At the same time, the central bank head cautioned that there appears be a shift in consumer borrowing patterns, which poses a risk for future growth, and warned that the impact of the natural disaster could lower first-quarter GDP by 1 percent as it disrupts the economic recovery. In turn, we are likely to see the RBA maintain a neutral tone in its policy meeting minutes due out next week, and the central bank may look to retain its wait-and-see approach throughout the first-half of the year as policy makers soften their outlook for growth and inflation. According to Credit Suisse Overnight index swaps, investors are now pricing a 25bp rate hike for the next 12 months amid earlier projects for a 50bp rise in the cash rate, and the downturn in interest rate expectations may continue to bear down on the exchange rate as market participants weigh the prospects for future policy.

As the AUD/USD slips below parity for the first time in nearly two-weeks, we may see the pair clear the 100-day moving average (0.9913) in the week ahead and revert back to the yearly low at 0.9803 as it searches for support. However, as risk trends continue to dictate price action for the major currencies, a rebound in market sentiment could prop up the higher-yielding currency, and the exchange rate may consolidate in the days ahead as price action settles around parity. - DS

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