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Australian Dollar Outlook Remains Bearish As Rate Expectations Falter

Australian Dollar Outlook Remains Bearish As Rate Expectations Falter

2011-09-23 20:57:00
David Song, Currency Strategist
Share:
Australian_Dollar_Outlook_Remains_Bearish_As_Rate_Expectations_Falter_body_ScreenShot124.png, Australian Dollar Outlook Remains Bearish As Rate Expectations Falter

Fundamental Forecast for Australian Dollar: Bearish

The Australian dollar bounced back from a fresh yearly low of 0.9668, but the high-yielding currency may continue to trade heavy in the week ahead as the central bank maintains a cautious outlook for the region. Indeed, the Reserve Bank of Australia continued to soften its hawkish tone for monetary policy as the recovery ‘looked somewhat weaker’ than initially expected, and the central bank may preserve a wait-and-see approach throughout the remainder of the year as policy makers anticipate the slowdown in economic activity to bear down on price growth.

However, as the RBA sees slower credit growth paired with a ‘persistent’ rise in the national savings rate, the central bank may show an increased willingness to scale back the rate hikes from the previous year, and Governor Glenn Stevens may talk up speculation for lower borrowing costs as the outlook for growth and inflation falters. According to Credit Suisse overnight index swaps, market participants see the cash rate being cut by nearly 150bp over the next 12-months, and interest rate expectations may deteriorate further as the isle-nation faces a protracted recovery. In turn, the rebound in the AUD/USD may be short-lived, and we may see the aussie-dollar threaten the rebound from December (0.9621) as the fundamental outlook for the isle-nation turns bleak.

As the economic docket for Australia remains fairly light for the remainder of the month, risk trends may play a greater role in driving price action for the Australian dollar, and the rebound in market sentiment may help to prop up the high-yielding currency as investors increase their appetite for risk. However, as the International Monetary Fund/World Bank semi-annual meeting takes center stage, the two groups may strike a dour outlook for the world economy, and fears surrounding the international community could spark a flight to safety as the prospects for global growth deteriorates. - DS

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