The neutral policy stance taken on by the Reserve Bank of Australia this week has certainly increased the appeal of the higher-yielding currency however, as the economic calendar for the following week is expected to reinforce a dour outlook for the $1T economy, deteriorating fundamentals are likely to weigh on the exchange rate.
[B]Australian Dollar May Fall as Fundamental Headwinds Lie Ahead[/B]
[B]Fundamental Outlook for Australian Dollar: Bearish[/B]
- Reserve Bank of Australia holds rates steady, raising the outlook for interest rates
- Australian economy unexpectedly contracts in 4Q
- Retail spending bucks global trend, rising 0.2% in January
- AUDCHF offers range-trade opportunities
The neutral policy stance taken on by the Reserve Bank of Australia this week has certainly increased the appeal of the higher-yielding currency however, as the economic calendar for the following week is expected to reinforce a dour outlook for the $1T economy, deteriorating fundamentals are likely to weigh on the exchange rate. Meanwhile, as market participants anticipate RBA Governor Glenn Stevens to hold the official cash rate steady at the 45-year low of 3.25%, long-term expectations for higher rates could stoke increased buying pressure for the Australian dollar but, as investors curb their appetite for risky assets, a rise in risk aversion would certainly drag on the aussie as risk trends continue to drive price action in the currency market.
Earlier this week, we saw the fourth quarter GDP report fall short of expectations as the growth rate contracted for the first time in eight-years, and as the outlook for growth and inflation falter, consumers and businesses are likely to turn increasingly pessimistic towards the economy. The NAB business confidence index slipped to a record-low in January lead by a drop in export demands, and as trade conditions deteriorate at a rapid pace, firms are expected to lower their outlook for future earnings as the downturn in the global economy intensifies. Furthermore, the economy is expected to have shed 20.0K jobs last month with the jobless rate rising to a three-year high, and a drop in employment certainly does not bode well for private spending going forward as households face a weakening labor market paired with financial uncertainties. Despite economists projections for a marked deterioration in the export-driven economy, RBA Governor Glenn Stevens refuted the arguments, stating that the unprecedented measures taken on by the central bank and the government will offer ‘significant support’ to the ailing economy, but went onto say that he expects the downturn in growth to ‘continue in the near term’ as demands from home and abroad deteriorate. As the growth outlook continues to reinforce fears of a prolonged economic slump, market participants have squabbled that the central bank has done too little too late, and as the economic docket next week continues to foreshadow a marked slowdown in the region, fundamental headwinds are likely to weigh on the high-yielding currency. - DS