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Australian Dollar at Risk on RBA Outlook, Global Slowdown Fears

Ilya Spivak

Fundamental Forecast for Australian Dollar: Bearish

The Australian Dollar struggled to mount a meaningful recovery last week having declined to the bottom of its multi-month range near the 1.02 to its US namesake. The fundamental backdrop appears ominous in the week ahead, hinting the high-yielding will remain under pressure as a deteriorating RBA monetary policy outlook and broader-based risk aversion conspire to undermine the currency.

First, a run of disappointing economic data over the past two weeks has prompted a rebuilding of RBA interest rate cut expectations. The markets are now pricing in 56 basis points in easing over the coming 12 months (according to data compiled by Credit Suisse), which amounts to the least forgiving policy backdrop in three months.

Scheduled event risk in the coming days threatens to reinforce this dynamic. On the domestic front, Private Sector Credit figures are expected to show the slowest year-on-year growth in nearly two years. Meanwhile, official and HSBC-produced versions of Chinese Manufacturing PMIs are due to show factory-sector growth slowed in April, undermining the outlook for overseas demand from Australia’s top trading partner.

Turning to the risk sentiment space, global slowdown fears seem likely to emerge early in the week as Asian markets react to Friday’s disappointing US GDP report. The threat of downside volatility remains elevated from there as the markets are hit with a barrage of top-tier US economic news-flow. April’s ISM Manufacturing gauge is expected to show a further slowdown in the pace of sector activity and the FOMC is likely to maintain a cautious tone in its monthly policy statement.

The closely watched US jobs report caps the week. An improvement is expected, with the economy adding 150k jobs in April compared with a dismal 88k increase in the prior month. US news-flow has increasingly underperformed relative to expectations over recent weeks however, suggesting economists continue to overestimate the health of the recovery and opening the door for another downside surprise.

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