Australian Dollar Outlook: Domestic factors pushed aside as Fed talks rate hike

AUTALIAN DOLLAR FORECAST: NEUTRAL

• The Australian dollar was boosted and abandoned by central banks
• The Fed is on for a rate hike and the RBA is eyeing a takeoff
• Volatile risk sentiment grips the world, will AUD/USD hold up?

The Aussie dollar hit a 10-month high of 0.7661 earlier in the week before weakening at the start of the weekend as global factors took precedence over domestic conditions.

The Aussie was boosted after the RBA monetary policy meeting on Tuesday. They left rates unchanged at 0.10%, but it was the hawkish tone of the statement that lifted the currency. In particular, the reference to “patience” regarding tightening was dropped.

Trade data disappointed on Thursday, coming in at AUD 7.46 billion for the month of February, down from the expected AUD 11.65 billion. The failure of the estimates was due to a 12% increase in imports, while exports were at the same level as in January. The exports side of the ledger met forecasts, but imports are only expected to increase by 2%.

Ironically, the lack of trade data is a symptom of Australia’s burning economy.

It should be noted that the impact of rising commodity prices has yet to be felt. The bulk of Australian exports are in long-term contracts that renew periodically and some have already done so, but those payments are still months away from hitting the ledger.

The charts below from the RBA highlight the differences between the spot (list) price of bulk commodities and the prices received by exporters.

The terms of trade are reaching multi-generational highs, further fueling domestic growth. The war in Ukraine continues to see an increase in demand for many Australian exports to replace Russian supply.

Various speakers from the US Federal Reserve have burst onto the talk show circuit this week, seemingly expressing their new found love for all things warmongering. The term “transient” is now only a distant memory.

The impact is that yields favor the US Dollar, which has undermined the AUD. The 10-year government bond spread narrowed to 30 basis points (bps) from a recent high of 47 bps.

China is also seeing a rise in Covid-19 cases and as it pursues a zero-case policy, the Shanghai financial hub is going into full lockdown. The spot price of iron ore therefore eased.

Looking ahead, jobs data will be released on Thursday, but it looks like it will take a big miss to impact the currency. While the Australian economy is healthier than it has ever been, the currency is driven by global markets and consequent swings in sentiment.

— Written by Daniel McCarthy, Strategist for DailyFX.com

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