Australian Dollar Under Pressure as Yield Spreads Shrink

[DailyFx]

Economic fundamentals are likely to take a back seat next week as Australian dollar price action continues to be guided by the global shift in interest rate expectations.






Fundamental Outlook For Australian Dollar: Bearish

- Australian trade deficit soars in July as oil imports surge 29%
- Second-quarter GDP growth slowest in 3 years, more rate cuts likely
- Reserve Bank of Australia cuts interest rates to 7.00% as expected

The forthcoming week begins with Reserve Bank Governor Glenn Steven’s half-year testimony before the Australian government. Stevens is unlikely to meaningfully augment the rhetoric seen in the last RBA policy announcement, arguing for easing borrowing costs as the economy has started to cool substantially enough to secure a return to price stability in the long run. Retail Sales are unlikely to mount a noteworthy recovery in July having contracted -1.0% in June. Although petrol prices came down significantly, borrowing costs remained at record levels. Indeed, Westpac’s measure of consumer confidence sank -6.7% in the same period. That said, retail activity will likely pick up a notch in Augusts’ figures as cheaper fuel and interest rate cut expectations are better absorbed into consumer sentiment. To that effect, the aforementioned Westpac gauge of consumer confidence surged 9.1% in August. The September edition is due for release next week.

Cautiously improving sentiment at home may not be enough to see NAB Business Confidence rebound in August having printed at a 7-year low of -9 for two consecutive months. Growth in the external sector has come into question as mining companies weigh up the chances of substantially diminished Chinese demand now that the Olympic Games are over. Indicative of the likely direction of business sentiment, Beijing’s failure to confirm a rumored fiscal stimulus package saw sharp fallout across Asian equities, including Sydney’s S&P/ASX 200 benchmark index. Depressed business sentiment is expected to see the economy add a mere 5.9k jobs in August, bringing the Unemployment rate to 4.4%.

On balance, economic fundamentals are likely to take a back seat next week as Australian dollar price action continues to be guided by the global shift in interest rate expectations. Recent weeks have seen high-yielding “carry” currencies lose ground across the board as the US Dollar and the Japanese Yen appreciated. This makes sense: neither the Bank of Japan nor the Federal Reserve are expected to cut interest rates next year while Australia, New Zealand, the UK and the Euro Zone are all slated for substantial monetary easing in 2009. This has set off sweeping reversals of multi-year trends across the forex market and is likely to keep the Australian dollar under pressure as traders price in the looming contraction in yield spreads.