With the Federal Reserve offering a drastic rethink on the future of US monetary policy—a rethink that should have been massively bearish for the US dollar and conversely big-time bullish for the Australian dollar—all was up for grabs for the Aussie last week, and yet, despite data showing Australia’s unemployment rate at an 8-year low, it managed to lose value, albeit by only a whisker.
The Australian dollar’s minuscule loss, which had it settling on Friday at $0.7086, despite the Fed slashing two interest rate hikes from this year’s projections, signals significant underlying weakness driven by an aversion to risk, not by monetary policy, and this bodes poorly for the currency’s near-term outlook.
Against the euro, too, which was shaken last week by some abysmal German manufacturing data and threats of tariffs on European auto exporters, Australian dollar appreciation would have been the bet to make, yet it could eke out only 0.4 percent worth of gains, to €0.6267, barely worth mentioning.
Against the Brexit-battered pound, the Aussie managed just a 0.5 percent increase to £0.5363. From here, a mere 1.2 percent decline would have AUD/GBP at rates in the £0.52s for the first time since the summer of 2016.
Against its cousin from across the Tasman Sea, the New Zealand dollar, the Aussie continues to plumb new lows for the year, at NZ$1.0292.
That the US dollar recovered strongly against all G10 currencies on Thursday and Friday is evidence enough that there is a flight-to-safety element playing out in FX markets, confirmed by a solid performance by the yen. Alternatively, one could say that the Fed’s discomfort with higher interest rates worsens the prospects of other central banks raising rates, making the US dollar the “cleanest shirt in the dirty pile,” as one analyst put it.
Regardless of the explanation, in any market, an inability to appreciate on good news (or on bad news for your opposite number) frequently precedes near-term price declines. In this particular case, medium-term declines are also likely if the banks are anything to go by.
Among those who should know these markets best is large Australian lender Westpac, which continues to be far more bearish on the Australian economy than the broader market and which continues to forecast two interest rate cuts by the RBA in the second half of the year.
“While support from … yield-seeking flows will persist, given the global backdrop and Australia’s growth outlook, it seems inevitable that they will moderate. Ergo, the ability for the Australian dollar to maintain or exceed the US$0.70 figure is only likely to remain until mid-2019, after which … growth, interest rate and commodity dynamics will re-assert,” Elliot Clarke, a Westpac economist, said last week.
Like JP Morgan, Westpac is forecasting an AUD/USD slide to $0.68 this year, which it describes as a “modest” forecast, indicating potential for a greater loss.
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