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Australian Dollar To Test Range As Risk Sentiment Wavers

Australian Dollar To Test Range As Risk Sentiment Wavers

2011-07-09 02:51:00
David Song, Strategist
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Australian_Dollar_To_Test_Range_As_Risk_Sentiment_Wavers__body_Picture_5.png, Australian Dollar To Test Range As Risk Sentiment Wavers

Australian Dollar To Test Range As Risk Sentiment Wavers

Fundamental Forecast for Australian Dollar: Bearish

The Australian dollar looks poised to trend sideways in the week ahead and the high-yielding currency may work its way back towards the lower bounds of its recent range as the shift away from risk-taking behavior gathers pace. However, as the Reserve Bank of Australia highlights a weakening outlook for the isle-nation, a slew of disappointing developments could lead the AUD/USD to threaten the rebound from the previous month (1.0390), and the central bank may continue to endorse a wait-and-see approach in the second-half of the year in light of the slowing recovery in the global economy.

After holding the benchmark interest rate at 4.75% for the seventh consecutive meeting, the less hawkish statement accompanying the decision suggests that the RBA will keep borrowing costs on hold throughout the coming months as the fundamental outlook remains clouded with uncertainties. The event risks scheduled for the following week could reflect expectations for a slower pace of growth, and the data may miss forecasts as the region continues to cope with the aftermath of the natural disasters from earlier this year. According to Credit Suisse overnight index swaps, investors see Governor Glenn Stevens maintaining the current policy over the next 12-months, but speculation for a rate cut could materialize going forward as the central bank curbs its outlook for growth and inflation. As interest rate expectations deteriorate, the Australian dollar will certainly struggle to hold its ground, and the high-yielding currency could face a bearish breakout in the days ahead as market participants scale back their appetite for risk.

As the rebound from 1.0390 fails to produce a test of 1.0800, we should see a near-term correction in the AUD/USD, and price action is likely to work its way back towards 1.0400 as it maintains the range carried over from the previous month. However, if the shift away from risk-taking behavior gathers pace in the week ahead, we may see a sharp decline in the exchange rate, which could expose former resistance around 1.0200. - DS

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