Australian Dollar to US Dollar Exchange Rate on Track to fall as Central Banks Diverge
Markets are increasingly confident that the Federal Reserve could hike US interest rates four times in total this year, while the Reserve Bank of Australia (RBA) continues to urge patience with its neutral and cautious outlook.
As a result, the Australian Dollar to US Dollar (AUD/USD) exchange rate has tested its worst levels this week.
As the Australian Dollar (AUD) outlook worsens further than the US Dollar (USD) outlook, the pair is just treading water above key support levels.
This week so far, AUD/USD has tumbled from the opening interbank level of 0.74 to near lows of 0.73. This is the worst AUD/USD level since January 2017.
The primary cause of AUD/USD losses has been the deepening in perceived policy divergence between the Federal Reserve and the Reserve Bank of Australia.
Australian Dollar (AUD) Exchange Rates Remain Unappealing as RBA News and Data Disappoint
The Australian Dollar (AUD) simply hasn’t been appealing to traders this week, with both domestic and global factors weighing heavily on the currency and making investors hesitant to buy it.
US President Donald Trump’s protectionist rhetoric on trade have caused trade war concerns to dominate headlines once again, worsening market fears that the US and China could clash on trade in a way that negatively affects other economies.
As China is Australia’s biggest trade partner this news, along with weaker commodity prices, has dragged down the risky commodity-correlated Australian Dollar.
On top of this, the Australian Dollar has been pressured by the Reserve Bank of Australia’s (RBA) persistent caution on monetary policy.
The latest RBA minutes were more dovish than expected and RBA Governor Philip Lowe has been eager to play up the necessity of patience regarding inflation and interest rates.
Perhaps the only thing keeping Australian Dollar trade from falling further this week is key support levels and market hesitance to oversell the currency too much.
US Dollar (USD) Exchange Rates Steady and Strong on Safe Haven Demand and Economy
Contrasting the Australian Dollar (AUD) and helping to keep AUD/USD near its worst levels in over a year, markets have a lot of reasons to rely on the US Dollar this week.
Investors are still optimistic about the US economy and Federal Reserve interest rate hike bets following last week’s Fed meeting, in which the bank hiked US interest rates and indicated that there could be four rate hikes in total this year.
With Federal Reserve interest rate hike bets high and the US economic outlook generally solid, the only real concern for US Dollar investors this week has been the perceived possibility of a US-China trade war.
Trade war jitters have worsened due to trade tariff threats made by US President Donald Trump.
Despite concerns that this may impact the US economy, the safe US Dollar still benefitted due to increased market demand for safe haven currencies amid the fresh trade jitters.
Australian Dollar to US Dollar (AUD/USD) Forecast: US PMI Data Ahead
It would take a surprisingly disappointing US dataset or a fall in demand for safe haven currencies for the Australian Dollar to US Dollar (AUD/USD) exchange rate to make a strong recovery from its lowest levels.
As a result, unless Friday’s US PMI projections from Markit print short of forecasts, AUD/USD will likely remain on track to end the week lower.
Markit’s US manufacturing PMI is forecast to have improved slightly, from 56.4 to 56.5. However, the overall composite figure is predicted to have slipped from 56.6 to 55.1.
While not as influential as ISM’s US PMI prints, this data and any further developments in US trade news are likely to be the only things that could still influence AUD/USD before the end of the week.
Australian Dollar (AUD) trade will likely continue to be driven by global trade developments too, as the only Australian data of note throughout next week is the nation’s private sector credit and new home sales stats on Friday.
Essentially, US data and US-China trade tensions will drive the Australian Dollar to US Dollar (AUD/USD) exchange rate over the next week.