AUTALIAN DOLLAR FORECAST: NEUTRAL
- The Aussie dollar had a wild ride as global markets wobbled
- Fed ready to correct past mistakes as rates move north
- US Dollar moves could outweigh strong fundamentals for the AUD
The Aussie dollar has one of the favorite fundamental funds of any currency in the world, but that means absolutely nothing right now. All focus is on the US dollar and the Aussie is swept up or down in the vacuum.
The Federal Reserve made a policy error in 2021 and is working to correct that error in judgment. As a result, the markets are rushing to their account.
The fundamental snapshot for the Aussie reads:
- Australia’s unemployment rate is at 3.9%, 48-low of the year
- RBA is hiking. The speed of rising rates is the only uncertainty.
- Year-over-year PPI is 4.9% and CPI is 5.1%, so there is not too much pressure in the pipe compared to other G-10 countries
- Rretail data beat estimates, +1.6% for March
- Jroadstead equilibrium beat estimates, AUD +9.3 billion in March, commodity prices are exploding throughout the complex
- Public and private debt levels are high, but lower than most developed economies as a percentage of GDP
- Bond yields have a healthy spread against most G-10 peers
- Terms of trade are at the top of generations (see table below)
Essentially, the longer the Aussie remains low, the greater the benefit to the domestic economy.
One source of uncertainty is the current federal election. There will be very little policy change if one of the two main parties wins a majority. This race is between Labor and the (Liberal/National) coalition.
However, a suspended parliament is a possibility due to the number of independent candidates who voted well. A suspended parliament will make it difficult to make any significant legislative changes over the next 3 years.
The AUD/USD is driven by a US dollar which has strengthened against most currencies.
This is due to the Fed catching up on policy that it left too loose for too long, allowing the inflation genie to come out of the bottle. As a result, the United States is eyeing a recession to quell mounting price pressures.
A possible savior for the Fed could be the easing of global supply chain bottlenecks. For that to happen, the war in Ukraine would have to find an early resolution and China would have to abandon its policy of zero Covid-19 cases.
Unfortunately, the war doesn’t seem to be ending any time soon. A Chinese government official recently publicly questioned the merits of the country’s zero-case policy. He disappeared from sight.
The ball is in the Fed’s court and the consequent strength of the US dollar seems to be the way of the day, for now.
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter