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Australian Dollar Outlook: Low for Longer Keeps the Good Times Rolling

Australian Dollar Outlook: Low for Longer Keeps the Good Times Rolling

Daniel McCarthy, Strategist

AUSTRALIAN DOLLAR FORECAST: NEUTRAL

  • The Australian Dollar remains hostage to external factors for now
  • RBA rate hikes arrive and exporters revel in prime trade conditions
  • An aggressively hawkish Fed presents risks. Will China’s stimulus rescue sentiment?
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The Australian Dollar has had another week of ups and downs as the machinations of global markets ricocheted through AUD/USD.

The RBA hiked rates as expected early in the week. The bank lifted the cash rate by 50 basis points to 1.35% from 0.85%. This is the first time that the bank has raised rates by 50 basis points at consecutive meetings.

With the RBA delivering on expectations, the Aussie came under selling pressure, and it continued to languish until trade data later in the week. A massive beat on forecasts saw AUD recover going into the end of the week.

A trade surplus of AUD 15.96 billion for the month of May easily outstripped AUD 10.85 billion anticipated. The continuing trade surplus, in the face of spot commodity prices going lower, illustrates the fundamental strength that comes from the long-term contracts of bulk commodities utilised by exporters.

In the week prior, Australia’s second tier economic data releases had been strong and all of them surprised to the upside. Retail sales, job ads and vacancies, private sector credit growth, home loans and building approvals all beat expectations.

This rosy domestic picture accounts for little when negative risk sentiment grips markets. In episodes of uncertainty and elevated volatility, correlations drift toward 1 and -1.

Industrial metals are caught in the same storm engulfing the AUD and a glance at the chart below highlights strengthening correlation.

AUD/USD, COPPER, IRON ORE, TIN, ALUMINIUM CHART

Chart created in TradingView

Going into to the end of last week, a potential boost to sentiment are reports that China's Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan (USD 220 billion) of bonds in the second half of this year.

The purpose of the issuance is to boost infrastructure and construction spending to counter the economic slowdown as a result of the zero case Covid-19 policy.

Looking ahead, the overarching theme of ‘recession risk versus fighting inflation’ appears likely to continue to play out, particularly in the US. The Fed have made it clear that they are determined to get CPI down. The recession fears are souring risk appetite.

The growth linked Australian Dollar typically underperforms in such circumstances. A lower Aussie makes imports more expensive locally and exports cheaper to foreign buyers, providing stimulus to the domestic economy.

The longer the currency stays low, the bigger the financial benefit outcome for Australians and the longer the post-pandemic party rolls on.

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--- Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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

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