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Can Australian Dollar Bulls Really Hope For Higher Rates?

Can Australian Dollar Bulls Really Hope For Higher Rates?

David Cottle, Analyst

Australian Dollar Talking Points:

  • The Australian Dollar has lost interest rate support as the Federal Reserve has tightened policy
  • The Reserve Bank of Australia still insists that, in time, it will probably do the same
  • That could be less certain than markets now believe

Fourth-quarter technical and fundamental forecasts from the DailyFX analysts are here.

The Australian Dollar market poses an interesting intellectual puzzle about now. Simply put, current interest rate pricing may chime well with Reserve Bank of Australia commentary, but it chimes rather less well with the global economic picture. One of these chimes just has to be a false note.

Some history is necessary before we go on. Bear with me.

Of course, the Australian Dollar has lacked interest rate support for some time now. Its home country’s key Official Cash Rate remains stuck at the 1.50% record low in place since August 2016. Moreover, its main comparator, the US Federal Funds Target rate – long lagging – equaled it at the end of 2017. It then went on to top the OCR, and the yield gap in the greenback’s favor continues to widen.

Now the Fed Funds rate is at 2-2.25%, and forecast to add another quarter percentage-point before the end of this year. You might think it small wonder that AUD/USD has been under consistent pressure all year long.

Rate-Hike Pricing Remains Very Tepid

Indeed, its purgatory may not be over yet. Local rate-futures pricing does not fully discount even one small increase in Australia over the coming 18 months. It does concur – just about – with the Reserve Bank of Australia’s oft-repeated belief that, when the next move comes, it will be a rise. However, no such rise is fully priced-in over the market’s entire horizon.

A Year Of Pressure: Australian Dollar Vs US Dollar, Daily Chart

So, to believe what the market is currently telling you, you have to believe that the RBA will still feel emboldened to raise interest rates at some point in mid-late 2019. Well, perhaps it will. But we are already, surely very well advanced in this economic cycle.

How Much Longer Can the Global Cycle Last?

There is debate about whether the current US equity bull market is really the longest since the Second World War but, whatever your position, you would have to concede it’s been a long one. Is it really going to last another two years and more? If you believe Australian rate pricing, you effectively have to think so.

The US has already clocked 38 quarters of uninterrupted annualized economic growth since the financial crisis simmered down. Australia has done even better. Its job creation record has been astonishing, but how much further can it possibly go?

Again, this looks like a very mature growth cycle. Can we really be so certain that it has years left to run? Could we be even without apparently endless trade differences between the US and China, slowing growth in the latter, Brexit, Eurozone cohesion and a host of other potential brick walls?

Of course, you might well believe that all these metrics will continue to improve for another two years, but, in that case, isn’t it more likely that Australian rates would rise sooner than markets now predict? It seems that, logically, one must accept that view or, more worryingly and perhaps more likely, that Australian rates may not rise at all over this cycle.

That latter prospect could yet see AUD/USD move meaningfully lower.

Resources for AUD/USD Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- 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.