Australian Dollar Outlook: It’s All About the Big Dollar

AUTRALIAN DOLLAR FORECAST: NEUTRAL

• The Australian Dollar has had a wild ride as global markets reeled
• The Fed is all set to correct the errors of their past as rates march north
• US Dollar moves may outweigh strong fundamental principles for AUD

The Australian Dollar has one of the preferred fundamental backdrops of any currency in the world, but it means absolutely nothing right now. All focus is on the US Dollar and the Aussie is being swept up, or down, in the vacuum.

The Federal Reserve made a policy error in 2021 and is scrambling to correct that misjudgement. As a result, markets are hurtling toward their reckoning.

The fundamental snapshot for the Aussie reads like this:

• Australian unemployment rate is at 3.9%, 48-year lows
• The RBA is hiking. The speed of rate rises is the only uncertainty.
• Year-on-year PPI is 4.9% and CPI is 5.1%, so there’s not too much pressure coming down the pipe compared to other G-10 nations
• Retail sales data beat estimates, +1.6% for March
• Trade balance beat estimates, AUD +9.3 billion in March, commodity prices are booming across the complex
• Public and private debt levels are high, but below most developed economies as a percent of GDP
• Bond yields have a healthy spread over most G-10 peers
• The terms of trade are at generational highs (see chart below)

Essentially, the longer the Aussies stays low, the bigger the benefit to the domestic economy.

A source of uncertainty is the Federal election that is underway. There will be very little policy change if either of the two major parties wins a majority. That race is between Labor and the Coalition (Liberal/National).

However, a hung parliament is a possibility due to the number of independent candidates that have been polling well. A hung parliament will make it difficult for any significant legislative changes over the following 3-years.

AUD/USD is being driven by a US Dollar that has been strengthening against most currencies.

This is due to the Fed playing catch up on policy that they left too loose for too long, allowing the inflation genie out of the bottle. As a result, the US is staring down a recession in order to quell rising price pressures.

A possible saviour for the Fed could be the easing of global supply chain bottle necks. For that to happen, the Ukraine war would need to find a hasty resolution and China would need to abandon their zero-case Covid-19 policy.

Unfortunately, the war doesn’t appear to be ending anytime soon. A Chinese government official recently publicly question the merit of the countries zero-case policy. He has disappeared from view.

The ball is in the Fed’s court and consequent US Dollar strength seems to be the flavour of the day, for now.

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter