AUSTRALIAN DOLLAR FORECAST: BEARY
- The Australian dollar is vulnerable to the development of the international scuffle
- Sunny review indicators are giving way to worrying omens
- The RBA becomes active on Tuesday. Will a hike move the face for AUDUSD?
The Australian dollar remains hostage to US dollar swings as the domestic economy shows signs of increasing fatigue ahead of Tuesday’s Reserve Bank of Australia (RBA) meeting.
Economic information released during the week was mixed, but overall, backward-looking indicators painted a rosy picture, while forward-looking data shows some clouds are brewing on the horizon.
July retail sales, a lagging indicator of sorts, were much stronger than forecast last Monday, coming in at 1.3% monthly versus 0.3% expected and 0.2% previously.
The next day’s building permit data showed a -17.2% plunge in July compared to June, well below expectations of -3.0% and -0.7% in the previous month.
Building permits are considered a leading indicator of economic activity because of the amount of work to be done in the near future after the permit is issued. A significant drop in data suggests there will be less work for engineers, architects, builders, equipment providers and so on.
In addition, higher interest rates appear to be impacting the Australian housing market, with data from Corelogic on Thursday showing the largest monthly depreciation in August in forty years. Sydney, the largest property market, fell 2.6% while prices across the country fell 1.6% this month.
A Bloomberg poll shows economists forecast a 50 basis point (bp) hike in the RBA’s interest rate target at Tuesday’s meeting. However, futures markets are pricing in closer to 40bp, which would take the cash rate to 2.25%. Before the pandemic, the RBA kept the rate in multiples of 0.25%. It’s currently off schedule at 1.85%.
After the US Federal Reserve clarified its aggressive monetary tightening agenda last week, the outlook for global growth has clouded somewhat. Risk assets are under pressure and as a result the Australian dollar has been hurt.
Going forward, the trend of US dollar strengthening seems intact. Combined with the overall negative sentiment, the Aussie could be undermined despite a big raise by the RBA.
Outlook China’s economic outlook is bogged down by lockdowns linked to the Covid-19 zero case policy and a real estate sector rolling from default to mortgage strike. This is despite government efforts to restore confidence in the industry with several stimulus measures.
Chinese PMI data released during the week showed more confidence in larger companies, while smaller companies see a less optimistic outlook.
Fortescue CEO Elizabeth Anne Gaines delivered results during the week showing that robust Chinese demand for iron ore is unshakable. She reiterated that forward-looking contracts for a steady volume are still in place. Fortescue is one of Australia’s iron ore titans.
The mining giant has a cost per tonne of iron ore of $15.91 per tonne. All Australian miners produce less than US$20 per tonne. So while the price of iron ore has fallen, the margin remains very strong.
Commodity markets have fallen on growth prospects and a stable US dollar.
AUD/USD VS COMMODITY EXPORTS
Chart Created in TradingView
Australia’s trade balance for July will be released on Thursday but is unlikely to reach June’s astronomical and record-breaking A$17.67 billion. Forecasts are still around A$10 billion, making a significant contribution to the nation’s bottom line. A lower AUD/USD exchange rate contributes to the contribution of exports.
The ASX 200 has just had an earnings season that has been mostly very positive. Unfortunately, the reported gains are akin to looking in the rear view mirror and the market is focused on what lies ahead.
The gloomy global growth outlook and weak leading indicators have pushed the ASX lower and if bearish momentum continues, it could attempt to test the June low near 6400.
Australia’s second quarter GDP data will also be released this week after the RBA changed interest rates. Not too much is likely to be revealed about the impact of monetary tightening. Although the first rise in interest rates began in May, interest rates were still well below 1% up until the third quarter.
This week is rich in data for the Australian Dollar and the numbers could generate some volatility for the currency. External factors appear to be influencing the AUD/USD, particularly the Fed’s rhetoric and the impact on the US dollar.
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel use the comments section below or @DanMcCathyFX on twitterright
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