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The fluctuations of the US dollar dominate the Australian dollar -by Ecork

Australian dollar forecast: slaughter

  • The Australian dollar rose due to the weakness of the US dollar
  • RBA rate hike pressure has been eased somewhat by the lack of CPI estimates
  • Fed actions and US GDP play an important role, but risks from a slowdown in China remain

The Australian dollar ended another turbulent week higher than where it began.

Domestic inflation numbers followed by the Fed rate hike and US GDP provided plenty of ammunition for the volatility. The Reserve Bank of Australia will make a decision on rates this Tuesday.

Australian CPI was not as hot as expected and offset the possibility of a big rally from the Reserve Bank of Australia this week.

This saw the AUD/USD move lower at the Fed meeting and a move of 75 basis points of it hit market expectations. The language from Fed Chairman Jerome Powell in the aftermath saw less adjustment in the Fed’s future hikes.

This dragged the US dollar and the Australian dollar down to US GDP numbers that surprised the downside, further undermining the US dollar and supporting the Australian dollar.

These three events saw Australian Commonwealth Government (ACGB) 3- and 10-year bond yields fall. This could undermine the Australian dollar if yields continue to move south.

AUD/USD, Australian 3- and 10-year government bond yields

Australian dollar forecast: US dollar volatility dominates the Australian dollar

Schedule cread in TradingView

The Reserve Bank of Australia will breathe a sigh of relief at their meeting this week. Despite the lack of expectations, 6.1% of the headline CPI is still a problem for the central bank when it has a mandatory target of 2-3%.

A 50 basis point lift is priced by the markets. Reserve Bank of Australia Governor Philip Lowe previously said the discussion at the August meeting is likely to focus on a 25 or 50 basis point increase in the cash rate target.

In the background, commodity prices were flat and mostly drifting higher on the back of a weak US dollar. The situation in China continues to plague global supply chains due to the Covid-19 zero-sum policy that is closing major centers on a rolling basis.

The deteriorating outlook in China is compounded by the deterioration of the real estate sector there. Between developers defaulting on their debt obligations, unfinished projects and mortgage-strike buyers, a solution seems out of reach.

The flow to the effects for the Australian dollar could be lower commodity prices at some point in the path. Fortunately for Australian commodity exporters doing business with China, most of their contracts are long-term and it will take some time before these effects are seen if the issues are not resolved.

Australian trade data will be released on Thursday and the market will be watching to see if last month’s A$15.97 billion surplus can be maintained.

Australian dollar forecast: US dollar volatility dominates the Australian dollar

Schedule cread in TradingView

— By Daniel McCarthy, Strategist for DailyFX.com

To connect with Daniel, use the comments section below or Tweet embed on Twitters

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