Aus Dollar: AUD pressured lower on Fed Tapering, Emerging Market Nerves and RBA Decision Looms

By Will Peters

aus dollar forecast ahead of rba decision

The Aus dollar (AUD) backed down from yesterday’s highs after the Commonwealth Bank of Australia cut its forecast for the currency.

The bank believes that the currency will depreciate more than they had previously anticipated.

Investors are looking ahead to next week where they are expecting the Reserve Bank of Australia to maintain interest rates at next week’s policy meeting.

  • The pound sterling to Aus dollar rate is 0.77 pct higher at 1.8894.
  • The euro to Aus dollar exchange rate is 0.71 pct higher at 1.5526.
  • The Australian to US dollar exchange rate is 0.9 pct lower at 0.8715.

Note: Our AUD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

Expect the AUD to remain under pressure into the RBA meeting next week.

The RBA is expected to keep the low interest rates till Q1 2015 due to the weak economic outlook and jobs market. This will likely send AUD further lower in medium term.

Also weighing on the Australian currency at present is that key determinant of exchange rate price action - the tapering of Federal Reserve asset purchases.

Citi analysts continue to see QE ending this fall, followed by an end to reinvestment early next year, and preparations for rate hikes closer to mid-2015. This will likely be USD-supportive and may undermine the AUD.

"Technically, AUD/USD may fall further to 0.8579, with resistance at 0.8821-0.8888," say Citi.

Analysts at ICN Financial meanwhile confirm further declines are likely, "AUDUSD is extended the upside yesterday, but the bounce remains so far corrective in our view as price settles below the key resistance around 0.8850 areas. A resumption of the overall bearish trend remains the most likely scenario as long as the latter resistance is intact."

Fed tapering is currently being acutely felt in emerging markets were imbalances have been rudely exposed as money flows back to the US and Europe.

This softening is likely to provide another headwind to the Australian dollar and should be watched closely.

Markets today

Poor earnings/guidance from high profile US companies (Amazon last night) helped sour risk sentiment.  

Asian trade was thin, due to the Chinese New Year celebrations, but risk aversion has picked up traction through the European  session; European stocks are lower, US 10-y bond yields are pressing 2.65% and, predictably, the JPY and the CHF are out-performing while the AUD, NZD and SEK are under-performing.  

Japan CPI rose 1.6% in the December year.  Australian December private credit rose 0.5%, above expectations. Eurozone CPI rose 0.7% in the January year, below forecasts of 0.9%; core inflation edged up a tenth to 0.8%.  Norway’s retail sales rose 0.1% in December.

US PCE data will come under scrutiny today amid expectations of soft price signals.  The January Chicago PMI data is released at 9.45ET and may decline from December’s strong report.  

The Michigan consumer confidence (final) report is out at 10.00ET.   Canadian industry level GDP is released at 8.30ET; we look for a 0.2% gain in output for the October month, in line with consensus expectations.