Fundamental Australian Dollar Forecast: Bearish

  • The Australian Dollar’s interest rate differential position arguably worsened last week- and it was pretty bad to begin with
  • The RBA dropped a telling phrase from its minutes
  • Growing trade tensions didn’t help either.

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The Australian Dollar limps into a new trading week buffeted by what might be termed a perfect storm.

Internally the currency has absolutely no support from its central bank. Indeed the minutes of the Reserve Bank of Australia’s June monetary policy meeting actually dropped the once-fixed assertion that the next move in rates is more likely to be up than down. Let’s not overplay this, the central bank probably still thinks that the next time rates move from their now ancient record low of 1.50%, it will be upward. But such a move isn’t coming anytime soon and the language change suggests that at least some rate setters are prepared to entertain doubts. According to index provider ASX, rate futures no longer fully price even a quarter percentage point increase at any time over their 18-month forecast horizon.

But there’s really little news here. The Australian Dollar has been on the interest rate differential back foot against its big US brother for months now.

What has hit AUD/USD harder perhaps is the apparently ever-growing trade spat between the US, China and to a lesser but significant extent, Europe and Canada. With threats of US tariffs and Chinese retaliation all-but daily occurrences, the Australian Dollars links to China –once so beneficial for the bulls- have become more of a liability.

No wonder perhaps that the Aussie should have plumbed lows not seen for more than a year against the greenback.

Now, the new week will bring very little for investors in the way of Australian economic numbers, but all the same, they probably shouldn’t expect much respite from recent, relentless falls. The Reserve Bank of New Zealand will set interest rates for June on Thursday. It’s not expected to raise its own Official Cash Rate from 1.75% and is expected to strike a more dovish note. If investors need any more proof that interest rates are stuck in Australasia, they are very likely to get it.

Battered Australian Dollar bulls’ only slight hope must be that the week’s plentiful US economic data underwhelm. There are various snapshots on offer from durable goods order levels through to consumer confidence and a look at Gross Domestic Product.

However, the Fed looks committed to further tightening its own monetary policy and it’s going to take headwinds of an almost unimaginable ferocity to change its mind. Those seem unlikely this week, which is one major reason why it just has to be another bearish Australian Dollar call.

Australian Dollar's 360 Degree Hammering Likely To Continue

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--- Written by David Cottle, DailyFX Research

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