Fundamental Forecast for Australian Dollar: Bearish

The past week was particularly rough for the Australian dollar, sliding across the board as the Reserve Bank of Australia downgraded its assessment of the global economy, leading to decreasing interest expectations, deflating the high yielding currency’s appeal to the broader market. Similarly, despite two interventions in support of weakening the safe haven currencies, the Japanese Yen and the Swiss Franc, the Aussie found increased pressure heading into the later part of the week, with global sentiment taking a sharp turn to the downside, leading to a sell-off in equity markets as risk-appetite evaporated. The net result was antipodean currency falling by 7.67 percent against the Swiss Franc, 5.18 percent against the U.S. Dollar and 2.75 percent against the Japanese Yen.

The Reserve Bank of Australia’s commentary was poignantly dovish, with the central bank noting that it is “not clear how persistent slower growth will be”. Furthermore, the central bank noted that as GDP is likely to remain in line with forecasts in the coming months and inflation tethered in a comfortable range, it was “prudent to maintain policy.” Markets reacted accordingly, sending the Aussie down across the board, with interest rate expectations completely flipping towards rate cuts. In fact, the Credit Suisse Overnight Index Swaps point towards -138.0-basis points priced in over the next 12-months, with a 96.0 percent chance of a 50.0-basis point rate cut at the next meeting – a near guarantee for at least a 25.0-basis point rate cut as concerns over global growth escalate.

There is some significant data on the docket for the coming week, and while it is expected that said data will spark some short-term volatility, broader global sentiment will guide the antipodean currency in the coming days, as it remains the quintessential carry trade. Regardless, it is important to note that certain events will have an effect on the currency in the short-term, as there are three events that could exacerbate Aussie losses or soften the landing for the struggling currency.

On Tuesday, home loans are due, which are expected to show a decline in lending in June. The 0.8 percent figure is less than the 4.4 percent reading in May, as liquidity has begun to dry up as consumers and institutions alike are concerned about the state of the global economy, even as Australia has remained quite resilient amid larger economies, such as the Euro-zone and the United States showing clear signs of slowing. Similarly, also released at 01:30 GMT on Tuesday are business conditions and confidence readings for July, which have held near zero for some time, falling in line with broader concerns about the state of the economy, in particular, whether or not China’s demand for commodities is slowing down. The Australia-China connection is similar to the Canada-United States connection; signs of a slowing Chinese economy weigh on the Aussie. Considering Chinese demand has propped up Australia’s mining sector while non-mining sectors have struggled, confidence in the economy right now is waning.

The key event for Australia for the week on their economic docket, however, is their labor market reading on Thursday, which could prove to be the lone bright spot for the economy in the coming week. Australia was hit hard by floods late last year that hurt the economy and the labor market, resulting in negative employment change levels for much of early 2011. The unemployment rate for July is expected to remain unchanged from its current level at 4.9 percent, where it has remained since March, following a 0.1 percent drop in February. A miss on the employment data would only further concerns, potentially being the straw that broke the Aussie’s proverbial back next week, as it moves closer towards parity with the U.S. Dollar.

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