Australian Dollar May Sink Further As Commodity Sell Off Continues

The Australian dollar continued its current downward trend as the RBA shocked markets with a 100bps cut, that would ignite a coordinated easing by several of the major central banks. The AUDUSD would drop below 0.6500 for the first time in five years before finding support.

Australian Dollar May Sink Further As Commodity Sell Off Continues

Fundamental Outlook for Australian Dollar: Bearish

- RBA Lowers Cash Target Rate by 100 bps, Surprising Markets
- Westpac Consumer Confidence Plunged the Most in Two Years, falling 11% after a gain of 7.0%
- Australian Employment Falls to 2,200 from 10,200 as Full Time Jobs Drop by 15,400
- Consumer Inflation Expectations Remain at 4.4%, As Easing Oil Prices Lower Expectations

The Australian dollar continued its current downward trend as the RBA shocked markets with a 100bps cut, that would ignite a coordinated easing by several of the major central banks. The AUDUSD would drop below 0.6500 for the first time in five years before finding support. The Australian economy continues to deteriorate which led to a sharp fall in consumer confidence and the labor market. The commodity driven country has suffered as demand for raw materials has dwindled and one of the highest interest rates has curbed domestic growth. Indeed, the current dour outlook for the global economy has sunk commodity prices sending the CRB index to its lowest value in a year to 300.12, and oil below $80 per barrel. 

The economic calendar will present some minor event risk given the broader economic concerns. NAB business confidence has remained at a seven year low the past two months and given the tightening of credit markets and bank failures we could see a precipitous fall in sentiment. Sinking confidence from business owners will continue to weigh on the labor market and domestic growth. The current downtrend in the economy may be spelled out tin the Westpac leading index which has slowed the past two months and as growth continues to slow it may signal that the country’s 17 year economic expansion is coming to an end. The RBA’s larger than expected rate cut signals that policy makers are anticipating the rate of growth to slow faster than was expected. Credit Suisse overnight index swaps are pricing in another 165 bps worth of cuts over the next twelve months and the majority of the easing may come in the next few months as market conditions worsen. Therefore, we could see continued weakness in the Australian Dollar. However, given the 2,50 point drop in this month alone, the possible future easing may be already priced in to the currency, and a resolution to the credit crisis may lead to a retracement. - JR