Fundamental Australian Dollar Forecast: Neutral

The Australian Dollar took a knock last week when its central bank just refused to play.

Investors had hoped that the Reserve Bank of Australia might have joined other developed-market monetary authorities in suggesting that higher interest rates were coming. In the event it didn’t. Instead it left the Official Cash Rate at its 1.50% record low and gave no hint that any changes were in the wind.

In truth it was always rather doubtful that enough had changed for the Australian economy to justify a policy shift, whatever central bankers in Canada, the UK and the Eurozone may feel. Moreover, although the next move in Australian rates probably will be to the upside, rate-futures markets still don’t price this in until the second half of next year.

So, what of this week? Well, the Aussie will face some interesting economic data out of its homeland, notably surveys of both business and consumer confidence. If they can trounce expectations, as Australia’s trade balance did last week then AUD/USD should at least find some support and may well push higher.

However, economic numbers are also due out of China and here risks seem a little asymmetric- the Aussie may not rise much on strong data, but it has shown a 
recent propensity to slide on disappointments
. There’s reason for this. The RBA has often worried aloud that Chinese demand for Australian raw materials may moderate. And the Australian government said just last week that the price of iron ore will be back below US$50/tonne next year as China’s steelmakers takes less of this key Australian export. Signs that any of these worries are justified tend to spook the currency.