Fundamental Forecast for Australian Dollar: Bearish
The Australian dollar was off by 0.32% this week as a broad-based risk sell-off slammed global markets. European debt concerns have once again come into focus with yields on Spanish debt topping pre-LTRO levels not seen since December. While broader market sentiment has largely remained on the defensive, data out of the Australia this week has had its own impact on the Aussie with our medium-term bias remaining weighted to the downside.
Although the RBA left interest rates unchanged this week at 4.25% as expected, remarks made by Governor Glenn Stevens weighed heavily on the aussie as he noted that while the current policy remains “appropriate,” the board “judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation before considering further steps to ease monetary policy.” The comments fueled speculation for future rate cuts from the RBA with Credit Suisse overnight swaps now factoring in a 90% chance of a 25 basis point cut next month with twelve month expectations calling for more than 80 basis points in additional cuts.
Looking ahead to next week, trader will be closely eyeing data out of Australia with February home loans, consumer inflation expectations, and employment data on tap. Data this week showed building approvals plummet by a staggering 15.2% y/y in the month of February with consensus estimates calling for home loans to decline by another 4% m/m, down from a previous decline of 1.2% m/m. In light of the recent rhetoric form the RBA, investors will be watching Wednesday’s consumer inflation expectation print as the central bank weighs implications for further easing against price stability. Employment data steals the spotlight next week with estimates calling for the addition of just 6.5K jobs with the unemployment rate expected to rise to 5.3% from 5.2%. With persistent weakness in the housing sector and the labor market continuing to weigh on domestic growth prospects, look for the Aussie to remain under pressure as traders begin to factor in further easing from the central bank.
Key data out of China may also have larger implications on the Aussie with March trade balance, industrial production, CPI, PPI, retail sales, and 1Q real GDP on tap next week. As Australia’s largest trade partner, deepening concerns about further slowing in Chinese growth is likely to contribute to weakness in the Aussie as demand for Australian exports wanes. With European sovereign debt concerns coming back into focus, look for fears of a hard landing in the world’s second largest economy to also weigh on broader risk sentiment with a continuation of the risk sell-off seen at the start of the month likely to weigh heavily on higher yielding, growth-linked assets.
From a technical standpoint, the AUDUSD has continued to trade within the confines of a well-defined descending channel formation dating back to the February 29th highs. Key daily support for the pair now rests with the 61.8% Fibonacci retracement taken form the December 15th advance at 1.0240 with a break here eyeing subsequent support targets at the 1.02-figure, 1.0180 and the 2012 low at 1.0145. Should this level be compromised, look for accelerated Aussie losses with extended targets held at the 78.6% retracement at 1.0075. Topside daily resistance stands at the 50% retracement at 1.0360 backed closely by the confluence of the 100 & 200-day moving averages at 1.0388. Only a breach above this level would negate out medium-term bias with such a scenario eying subsequent resistance targets at the 38.2% retracement at 1.0475. With the results of today’s US employment report yet to be digested by broader markets, look for weakness in the high yielder to persist next week with rally’s offering favorable short entries on the AUDUSD. – MB