Australian Dollar Strength Fades, RBA Poses Downside Risks
The Aus dollar continues to strengthen into mid September but can the gians continue?
The Aussie is the outperformer at present.
The pound to Australian dollar exchange rate (GBPAUD) has fallen with the pound making way for the Australian currency which has put on 6 consecutive days of gains.
A similar pattern of AUD strength against the EUR and USD has also been noted with the currency proving to be the outperformer in G10.
Near-Term Political Support Should Prove Temporary
The Aus dollar benefited from political event-risk after it was announced PM Tony Abbott would be replaced by Malcolm Turnbull.
“The view is unanimous that Turnbull will be market and business friendly, but if he has a chance at restoring the political agenda and confidence, he will need to unify the Liberal party first,” says a note from TD Securities in Singapore.
However, such politically-inspired momentum tends to be temporary in nature and we would urge those with big currency payments to look at the longer-term picture.
Indeed, we would suggest booking profit on recent strength at current levels looks reasonable.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0143▼ -0.09%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9458 - 1.9538 |
**Independent Specialist | 1.9861 - 1.9941 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Big Risk = The Reserve Bank of Australia
Looking at the bigger picture it is the level of Australian interest rates that really matters.
The RBA have this week expressed concern over recent global market developments; could they be laying the foundation for an addition interest rate cut?
If this were to be the case then the outlook for the AUD will certainly turn increasingly negative.
“The minutes are not a game changer but they did strike a dovish tone, compared to the statement from 2 weeks ago that suggested the RBA had set a high bar to cutting rates further. The minutes reveal a bank that is more wary of recent events, the Bank noting that economic developments have raised the risks to the global outlook,” note TD Securities.
On China, the RBA said there are downside risks to growth, given the recent run of data, but said at this stage it is too early to assess the impact.
The RBA also highlighted the potential for large moves in assets on Chinese capital flows.
On the Fed, the Bank stated the US tightening of policy could have “significant effects on financial markets despite the fact that it had been well telegraphed.”
Once again inflation is seen as a non-issue, the Bank expects low rates to be supportive for dwelling investment, but did acknowledge APRA measures did slow investment house lending.
The positive was the Bank nodding to the move lower in the AUD, saying it was expected to support growth, particularly through a larger contribution from net service exports.
“Despite any rallies from Turnbull’s victory or expectations for the Fed to keep rates on hold, the longer-term trend is for further weakness in the Aussie,” says Angus Nicholson at IG in Melbourne.
Australian Dollar v USD Dollar Technical Outlook Suggests Gains May End
AUD/USD has rallied to, tested and so far failed at its 4 month downtrend at 0.7158.
"Rallies are expected to remain capped by the 0.7158 4 month downtrend and 0.7205 (last weeks high)," says analyst Karen Jones at Commerzbank.
Failure here should provoke a retest of the 0.7050 support suggests Jones.
"Below 0.7050 will alleviate immediate upside pressure and retarget the .6905 recent low and then 0.6774 the 2004 low longer term. We note the 13 count on the 240 minute chart and this adds weight to the idea of failure here," says Jones.
Meanwhile, against the pound sterling we have seen a turn in fortunes as markets begin to factor in an imminent UK interest rate rise.
The GBPAUD has fallen through September but the support zone at 2.150 has proven its worth as we suggested it could.
We look for a move higher back into the middle of the Aug/Sept range which broadly encompasses 2.18.
