Fundamental Forecast for the Australian Dollar: Bearish
- Australian Dollar breaks down from three month range after US election
- Trump policy platform may feed Aussie-negative Fed vs. RBA divergence
- US PPI and CPI data, Fed-speak threaten AUD/USD in the week ahead
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Breakneck volatility in the wake of the US presidential election may have finally set direction for the Australian Dollar after three months of aimless drift. The markets spent much of last week on-boarding an unexpected victory by Republican nominee Donald Trump and adjusting portfolios for the attendant US policy pivot on the horizon. The sum total of investors’ prognostications appears to bode ill for the Aussie.
First, Mr Trump’s advocacy of grandiose infrastructure spending, tax cuts and deregulation has been interpreted as inflationary. The US economy is has been heating up since early 2015. Wage inflation has trended higher while payrolls gains decelerated, pointing to a tightening labor market. Meanwhile, a sharp US Dollar stalled and crude oil recovered, helping to digest prior disinflationary shocks.
A large dose of fiscal stimulus against this backdrop is akin to pouring gasoline on a flickering coal heap: a conflagration is all but assured. That beckons faster tightening on the part of the Federal Reserve. The markets have clearly noticed: benchmark US Treasury bond yields duly rallied and the 2017 rate hike path priced into Fed Funds futures noticeably steepened.
For its part, the RBA has signaled it is in wait-and-see mode for the foreseeable future. Coupling this with a more hawkish posture from the Fed will probably translate into an Aussie-negative shift in relative yield expectations. In fact, the prospect of higher US borrowing costs may prove to be disproportionately painful for the Australian unit considering that a comparatively higher-yielding profile is its main allure for traders.
