With the Reserve Bank of Australia holding fast on interest rate policy in its latest decision, the stage is set for a dip in the local dollar as US and Australian monetary policy gradually converge.While the guidance for Australia stresses a number of different risk factors that could drag on the outlook, the risk factors for the US are largely skewed to the upside.As such, after a minor technical correction higher in the AUDUSD pair for the better part of the last year following a multi-year downward trend could be set for a rapid reversal.
A strong emphasis on fiscal stimulus combined with climbing inflation and falling unemployment could beckon quicker tightening of US interest rates, helping catalyze a US dollar rally.By comparison, expectations are for additional easing of Australian interest rates in 2017, especially if the rebound in commodity prices over the last year subsides.With rates projected to move in opposing directions, a retest of support at 0.7130 might be inescapable as AUDUSD faces renewed downward pressure.
Australian Guidance Weakens
In an attempt to weather the ongoing global trade storm, Australia has been very proactive in reducing interest rates in an effort to spur growth in areas of the economy unrelated to commodity extraction and exports.While the moves have helped to tackle joblessness, bringing the measure down to the lowest rate since 2013, the Reserve Bank of Australia has highlighted underutilization as job creation focuses predominantly on part-time employment.The other purpose of lower rates has been fighting disinflation.
Consumer prices growth in Australia has fallen significantly over the last year, mirroring developments across many advanced economies.Australia has been especially hard hit by disinflation because of the high level of exposure to natural resource prices.With the RBA targeting between 2.00% to 3.00% inflation, the latest annualized figure of 1.30% remains well below the Central Bank’s goal.As such there is a substantial probability of the RBA undertaking additional accommodation to help raise the measure and promote growth within the economy.
