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Australian Dollar Could Well Feel Rate Differential Chills Again

Australian Dollar Could Well Feel Rate Differential Chills Again

David Cottle, Analyst

FUNDAMENTAL AUSTRALIAN DOLLAR FORECAST: BEARISH

  • Australian Dollar just had a roller coaster week
  • What strong GDP gave, trade and emerging-market worries took away
  • This week it has to face the Fed

Find out what retail foreign exchange traders make of the Australian Dollar’s chances right now at the DailyFX Sentiment Page.

The Australian Dollar has just endured something of a volatile week. The good news, perhaps, is that it may not be set for a repeat in the next seven days. The bad news, for bulls at least, is that there are few reasons to expect much more strength.

The Aussie rose on stronger-than-expected retail sales and corporate profits data last week. These raised the curtain for what turned out to be a blockbuster return to form for official Gross Domestic Product expansion in the first quarter. Its 1% rise knocked forecasts way out of the park.

However, GDP figures are always open to charges of tardiness- we are after all close to the end of the second quarter now. Sure enough, the currency was hit by more-recent data. April’s trade surplus wasn’t far from market hopes but export weakness fueled worries that the first quarter may just be as good as it gets for the Australian economy this year.

The currency was hit again by worries about the emerging markets, and by AUD/USD’s its inability to break above technical resistance around the 0.7672 level.

The coming week will probably seek market interest focused on Thursday in the Asia Pacific region. That’s when Australian employment numbers will see daylight. These are expected to come in quite strongly, but the Australian economy has been a job-creation machine for some time without much impact on inflation or, crucially, the Reserve Banks’ relaxed attitude to raising interest rates. Futures markets don’t expect any increase in the Official Cash Rate’s 1.50% record low until the end of 2019.

And the US Federal Reserve’s June monetary policy decision is also due Thursday Asia Pacific time. The central bank is widely expected to raise rates once more, and markets will of course be keen on any steer as to how much more often it may do so this year.

Whatever impression they get, another Fed rate rise will probably remind markets just how firmly interest-rate differentials are running against the Aussie Dollar, not just at the moment, but for the foreseeable future.

With that in mind, it’s a bearish call this week.

Australian Dollar Could Well Feel Rate Differential Chills Again

Roller-Coaster. AUD/USD Daily Chart Showing Last Week's Volatility

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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