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Credit Agricole: Forecasting Extension of Australian Dollar Weakness

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Credit Agricole foresee further Australian dollar weakness

The Australian dollar is the worst performing currency in G10 at the start of the new month and chasing the currency lower should continue to yield profit say forecasters at Credit Agricole. Valentin Marinov, Head of G10 FX Strategy at Credit Agricole writes:

Overnight the main focus was on Australia, where the RBA cut interest rates to 1.75% from 2% prompting a sharp drop in the currency.

The central bank indicated that 'extraordinarily' low inflation and uncertainty as related to the global economic outlook were among the main reasons supporting a more aggressive monetary policy stance.

In addition it was reiterated that a further appreciating currency would complicate an economic adjustment.

It must be noted too that the central bank does not appear to be overly worried that lower rates would reignite a housing boom.

As a result to the above outlined conditions the AUD was among the weakest currencies in Asian hours.

However, it must be noted too that on the back of last week’s weaker than expected Q1 inflation print, markets already priced in a larger than 50% probability of the RBA easing monetary policy today.

Even if the central bank leaves all options regarding a more aggressive stance later on open, it cannot be excluded that it will increasingly become a notion that the lower bound in terms of rates has been reached.

As such it appears unlikely that pairs such as AUD/USD will continue its trend lower unless external factors such as more aggressively rising Fed rate expectations make a case of further diverging rate expectations.

As we stay of the view that the Fed will tighten monetary policy in June, we see scope of that to happen. Hence we remain short AUD/USD via options.

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