Australian dollar forecast: bearish

The Australian dollar is bubbling higher after a tumultuous week that saw data and commentary collide.

On the domestic front, retail sales for the month of October slid by -0.2% month-on-month instead of rising by 0.5% as expected.

Private sector credit for October showed growth of 0.6% month-on-month as expected. This contributed to an annual read of 9.5% year-on-year, which was also in line with forecasts.

Building approvals for October showed a decline of -6.0% month-on-month, a deeper decline than the prior month’s -5.8% print and well below the -2.0% anticipated by forecasters.

For the first time, the Australian Bureau of Statistics (ABS) published a monthly CPI figure. There will be two such releases between the quarterly figures. These prints will cover 62-73% of the weighted quarterly basket.

The official CPI reading for the RBA’s target band of 2-3% will remain as the quarterly number. Year-on-year CPI came in at 6.9% in October, way below forecasts of 7.6%.

All of this meant very little compared to the market reaction to the much-anticipated briefing from Federal Reserve Chair Jerome Powell on Wednesday.

Before his remarks, a chorus line of Fed speakers got the message out that the bank will be raising rates by less than the previous four lifts of 75 basis points (bps). This implied endorsement of the 50 bps rise at the December meeting that interest rate markets priced in months ago.

Mr Powell spoke from the same song sheet, but the market danced to its own tune regardless of what the bass section was doing. Equities rallied, Treasury yields collapsed, and the US dollar went into a tailspin.

The crunch on the US dollar sent the Aussie dollar to a 13-week high above 68 cents. The path ahead is somewhat tricky going into the end of the year.

Crucially, the RBA will be deciding on rates this Tuesday. The market is pretty much 50/50 on a 25 bp bump up, with 13 bp priced in.

A Bloomberg survey of economists has a majority of respondents looking for a 25 bp hike. After the December verdict, the RBA will not be meeting again until early February.

Australian GDP data will be released on Wednesday and forecasters are eyeing 6.1% growth year-on-year to the end of October. That would be a stellar number except for the fact that inflation is right up there with it, making real growth negative.

Nonetheless, the Australian economy is in great shape compared to most other nations and the longer the Aussie stays in the 60s the greater the largesse locally.

It would seem that in the near term, AUD/USD is more likely to be influenced by ‘big dollar’ gyrations rather than domestic factors.

Looking ahead, a recalibration of Fed expectations might see the US dollar steady somewhat, potentially giving Australian exporters another bite at the cherry.

AUD/USD chart