Mounting turmoil in the financial markets paired with falling commodity prices have triggered heavy selling pressures for the Australian dollar earlier this week, but recovered from a three-day losing streak as rising stock prices mixed with a rebound in commodities has helped to heighten the appeal of the high yielding currency.
Australian Dollar To Rebound as Risk Appetite Returns
Fundamental Outlook For Australian Dollar: Bullish
- RBA Minutes Highlight Dovish Bias
- Governor Stevens Notes Changes in ‘Spending and Borrowing Dynamics’
- Australian Dollar Recovers From Three-Day Losing Streak
Mounting turmoil in the financial markets paired with falling commodity prices have triggered heavy selling pressures for the Australian dollar earlier this week, but recovered from a three-day losing streak as rising stock prices mixed with a rebound in commodities has helped to heighten the appeal of the high yielding currency. Meanwhile, after lowering the benchmark interest for the first time in seven years, RBA policy members stated that ‘demand could weaken more sharply than necessary,’ the minutes of the September 2nd meeting showed.
The central bank has taken a preemptive approach in supporting economic growth for the $1 trillion economy as they noted that ‘a necessary precondition for a decline in inflation back towards the target was therefore in place, even though evidence for that decline would not be seen in the figures for some time.’ The central bank highlighted that the economic implications of holding higher borrowing costs ‘would deliver a faster reduction in inflation, but at greater short-term economic costs.’ The RBA has clearly pushed inflationary concerns to the backburner as economic growth continues to deteriorate, which suggests that the central bank may lower the benchmark interest rate further over the coming months.
Furthermore, in a speech this past Wednesday, RBA Governor Glenn Stevens noted that ‘we are witnessing the early part of a new phase where the household spending and borrowing dynamic is different from the past decade and a half,’ and said that there will be ‘ a good chance that households will for some time seek to contain and consolidate their debt, grow their consumption spending at a pace closer to income.’ He went on to say that the ‘more conservative approach to debt among households’ would mean that ‘growth opportunities for businesses and financial institutions will be different.’ The comments suggests that the Australian economy could weaken at an even faster pace over the following months, and only strengthens the argument that the central bank will continue to lower the benchmark interest going forward. Overnight index swaps are showing that market participants have already priced in at least 100bp of rate cuts over the next 12 months, which would only fuel bearish sentiment for the Aussie against its currency counterparts.
The economic calendar for the week ahead is extremely light, which suggests that risk sentiment will continue to drive price action for the Australian dollar. However, a fall in the skilled vacancies could trigger selling pressures for the Aussie as the RBA shifts their focus to growth. Despite mounting growth concerns, the response by central banks and regulators across the globe to the financial crisis has clearly helped to improve confidence in the financial markets, and should help to boost buying pressures for the Australian dollar. - DS
