Australian Dollar At Risk as Investors Weigh Outlook For Future Policy

[B]Australian Dollar At Risk as Investors Weigh Outlook For Future Policy[/B]

[B]Fundamental Outlook for Australian Dollar: Neutral[/B]

Long-term expectations for higher borrowing costs paired with improving fundamentals are likely to drive the Australian Dollar higher over the following week as market participants expect the Reserve Bank of Australia to hold a neutral policy stance going forward. A Bloomberg News survey shows all of the 20 economists polled forecast the RBA to hold the benchmark interest rate steady at 3.00% in July, with investors speculating the central bank to tighten policy over the next 12 months, and expectations for an economic recovery later this year could support a near-term rally as the central bank attempts to put a floor on the interest rate. At the same time, the Organization for Economic Cooperation and Development expects the region to grow at a slower pace next year, and continued to see scope for further easing as the nation faces a weakening labor market paired with deteriorating trade conditions.

Moreover, the International Monetary Fund also called on the RBA to lower the cash rate further as the economic outlook ‘remains weak and highly uncertain,’ but nevertheless, the economic docket for the following week is likely to encourage an improved outlook for growth and inflation as economists anticipate retail spending to rise for the third consecutive month in June. However, a drop in skilled vacancies could reinforce fears of a protracted downturn as households face fading demands for employment, and the deepening slump in the labor market may lead Governor Glenn Stevens to take additional steps to foster a sustainable recovery as the central bank head sees scope for ‘further easing.’ In addition, the trade deficit is expected to widen to AUD –125M in May as foreign demands falter, and a bigger-than-expected drop in exports could drag on the exchange rate as investors weigh the outlook for future growth. As a result, deteriorating fundamentals could lead the AUD/USD to trend lower in the week ahead as growth prospects falter, and the lack of momentum to retrace the sell-off from the yearly high could foster a bearish outlook for the aussie-dollar over the near-term. - DS