Australian Dollar Forecast: Neutral
- The Australian Dollar has succumbed to external factors
- The US Dollar rallied across the board as Treasury yields spike again
- Perceptions around the Fed appear to be driving currencies, will it sink AUD/USD further?
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The Australian Dollar got hammered every day last week with the US Dollar juggernaut trampling across markets and sending the Aussie to a six-month low.
The fundamental backdrop appears to be slipping slightly after retail sales for April came in flat month-on-month rather the 0.3% forecast and 0.4% prior. It comes on the back of the unemployment rate ticking up to 3.7% against 3.5% previously.
The data is inline with the RBA expectations as noted in the May monetary policy board meeting minutes that were released last Tuesday.
The bank noted, “In weighing up the two options, members recognised that the arguments were finely balanced but judged it was appropriate to increase interest rates at this meeting.
For AUD/USD though, the domestic economy and the RBA mean very little when the US Dollar is dancing on centre stage, as it is at the moment.
Several speakers from the Federal Reserve reiterated the message that rates will either need to be hiked further or at the very least, a pause in the Fed funds target rate might be appropriate.
If the latter is to come to fruition, they made it clear that it will need to stay there for a lengthy period of time to get inflation back down to their 2% target.
Interest rate markets are now pricing in a roughly 80% chance of a 25 basis point lift in rates by the July Federal Open Market Committee (FOMC) meeting.
Treasury yields have been marching higher and on Friday the 1-year bond traded over 5.3%, marking a 23-year high after having traded as low as 4.03% in March.
The yield spread between Australian Commonwealth Government bonds (ACGB) has widened again in the short end and this has probably undermined AUD/USD.
The benchmark 2-year bond spread is around 90 basis points in favour of the ‘big dollar’. The 10-year spread has been quite stable and this may indicate that the Fed’s rate path might be where the market is focussed for now.
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Chart created in TradingView
— Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCarthyFX on Twitter