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Bearish AUD/USD Outlook to Gather Pace on RBA/Fed Policy Divergence

Fundamental Forecast for the Australian Dollar: Bearish

AUD/USD slipped to a fresh 2015 low (0.7259) as Australia faces a greater risk of losing its AAA credit-rating, and the pair may encounter a further decline over the near to medium-term should the slowdown in China – the region’s largest trading partner – put increased pressure on the Reserve Bank of Australia (RBA) to further embark on its easing cycle.

Even though Standard and Poor’s retained a ‘stable’ outlook for the $1T economy, the agency warned of a possible downgrade ‘if Australia’s budgetary performance does not improve broadly,’ and went onto note that an ‘external shock’ may also put the rating under pressure as the region grapples with below-trend growth. Indeed, the slowdown in China may become a growing concern for Australian officials as the outlook for global growth deteriorates, and the RBA may adopt a more dovish tone over the coming months as Governor Glenn Stevens keeps the door open to further assist with the rebalancing of the real economy.

The fundamental developments coming out next week may spur a further decline in AUD/USD as Australia Building Approvals are projected to contract 1.0% in June, while the region’s Export Price Index is anticipated to contract another 4.0% in the second-quarter amid weak commodity prices paired with the downturn in global trade. At the same time, the fresh batch of central bank rhetoric coming out of the Federal Reserve’s July 29 interest rate decision may heighten the bearish outlook for AUD/USD as Chair Janet Yellen continues to talk up bets for a 2015 rate hike, and the policy divergence should foster a longer-term decline in the exchange rate especially if the committee shows a greater willingness for a September liftoff.

As a result, AUD/USD may continue to search for support throughout the last full-week of July, and the pair may ultimately give back the advance from back in 2008 as weakening growth prospects across the Asia/Pacific region fuels bets for lower borrowing-costs in Australia. In contrast, the greenback may continue to outperform against its major counterparts as the Fed stays on course to remove the zero-interest rate policy (ZIRP). - DS