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Australian Dollar US Dollar (AUD USD) Long-Term Forecast: Speculation on RBA and Fed Outlooks to Drive Volatilty

Australian Dollar Currency Forecast
  • RBA meeting minutes provoke mixed ‘Aussie’ reaction – Markets hope for future change in bank’s inflation target
  • Forecasts suggest RBA could be less willing to cut interest rates again – Lack of easing could bias Australian Dollar to the upside
  • Weaker US inflation dented odds of imminent Fed rate hike – AUD USD exchange rate strengthened in response to disappointing result
  • New York Fed President maintained hawkish tone – US Dollar could find support if policymakers continue to indicate possibility of September move

Increased Odds of Fed Tightening Continue to Weigh on AUD USD Exchange Rate

Investors continued to price in higher odds of the Fed raising interest rates before the end of the year on Wednesday. Hopes appear high for the FOMC to have adopted a more hawkish tone in its latest meeting minutes, keeping the AUD USD exchange rate on a downtrend. As a result, despite positive Australian data, the pairing was trending in the region of 0.7621 towards the end of Wednesday’s European session.

(Previously updated at 15:55 on 16/08/16)

It has been a strong start to the week for the AUD USD exchange rate, which has benefitted from a number of disappointing US ecostats. Can the Australian Dollar maintain its recent bullish gains in the longer-term, however?

Weaker US Data Boosted Risk Appetite and AUD USD Exchange Rate

Despite signs that the Chinese economy could be slowing once again markets returned to a greater state of risk appetite this week. In large part this was due to the bearishness of recent US data, which had led investors to dial back their expectations for the timing of the next Federal Reserve interest rate hike. Confidence in the world’s largest economy was dented by the latest Advance Retail Sales, University of Michigan Confidence and Empire Manufacturing Indexes all falling short of forecast. As a result the Australian Dollar to US Dollar (AUD/USD) exchange rate was able to make some strong gains.

A rally in iron ore prices helped to support the antipodean currency at the start of the week, with investors still hopeful that the Australian economy is continuing to transition to a post-mining footing. Demand was also boosted by a strong uptick in the ANZ Roy Morgan Weekly Consumer Confidence Index, which pointed towards greater optimism within the domestic economy.

RBA Minutes Failed to Eliminate Odds of Rate Cut as AUD Remains Under Pressure

Initially the Australian Dollar reacted positively to the August meeting minutes of the Reserve Bank of Australia (RBA), which some investors assessed to be less dovish than expected. There were hopes that the departure of Governor Glenn Stevens could lead to a reconsideration of the current inflation target. Any revision in the inflation target would reduce the pressure on the bank to cut interest rates further, a possibility that could give the antipodean currency a strong boost against rivals.

However, the upcoming Australian employment data is seen to have taken on greater significance in the wake of the minutes. Policymakers expressed some uncertainty over the outlook of the jobs market, leading Lee Hardman, Currency Analyst at MUFG, to note:

‘As a result, the market is likely to focus increasingly on the health of the Australian labour market going forward to assess the likelihood of further rate cuts which would take some of the shine off the Aussie. Absent a material weakening of labour market conditions, the RBA is not under immediate pressure to deliver further rate cuts this year offering support for the Aussie in the near-term alongside current favourable conditions for carry trades.’

Regardless of the RBA’s outlook, though, the primary influence of the AUD USD exchange rate in the near term is likely to be speculation over the next move of the Federal Open Market Committee (FOMC). In that line researchers at RBS commented that:

‘We remain cautious on the Australian dollar against the US dollar given financial markets are underpricing the risks of Fed tightening this year. The RBA may be reluctant to keep cutting rates but the search for yield currently driving summer currency markets is unlikely to persist as the next Federal Open Market Committee comes into view in September.’

US Dollar Forecast to Remain on Back Foot as Chances of 2016 Fed Rate Hike Diminish

Tuesday’s US inflation data did not particularly encourage the likelihood of the Fed returning to its monetary tightening cycle imminently. Although expectations had been for a fall from 1.0% to 0.9% in the annual Consumer Price Index the July result was instead found to have dipped to 0.8%. This added further weight to suggestions that the US economy is not in as robust a state as Fed policymakers would like, prompting the ‘Greenback’ to extend its losses against rivals. Investors took this as additional incentive for the FOMC to hold off on another rate hike, as Rob Carnell, Chief International Economist at ING, noted:

‘For the members of the FOMC, this is another reading that shouts a message for continued caution with respect to the pace and timing further rate hikes. Despite some further good news from the labour market, we see little case for a September rate hike, which suggests that a December hike is the best chance for a hike this year, and our forecast remains that the next hike will not be until 1Q2017.’

However, with some weeks to go before the Fed meets for its September rate decision upside potential for the US Dollar remains. New York Federal Reserve Bank President William Dudley took a more hawkish tone in recent comments, with the policymaker indicating that an imminent rate hike remains possible. Nevertheless, if domestic data continues to paint a less-than-robust picture and negative global headwinds persist then the AUD USD exchange rate could continue to benefit from the diminished odds of a 2016 interest rate move.

Current AUD, USD Exchange Rates

At the time of writing, the Australian Dollar to US Dollar (AUD USD) exchange rate was trending higher in the region of 0.7691, while the US Dollar to Australian Dollar (USD AUD) pairing was on a downtrend around 1.2996.