Fundamental Australian Dollar Forecast: Neutral

Late last week the biggest near-term risk facing rampant Australian Dollar bulls became clear: it’s the currency’s own central bank.

Reserve Bank of Australia Deputy Governor Guy Debelle gave AUD/USD serious pause on Friday. He spoke in Adelaide and poured cold water on the idea that recent RBA discussions of Australia’s neutral interest rate presaged any prospect of a hike in the country’s record-low, 1.5% Official Cash Rate. He also said that local rates will not have to rise in step with those of other developed economies.

The latest set of RBA policy meeting minutes was released last week, before Debelle spoke. It saw markets wondering whether the OCR might just be going up a little sooner than they thought. Talk of a 3.5% neutral rate seemed to some to imply that so loose an OCR could not last much longer. However, the RBA seems very keen to disabuse them.

Now, despite this the Australian Dollar remains in something of a bullish sweet spot, especially against its big US brother, and that certainly shows in recent price action. AUD/USD reached two-year highs last week and almost broke above the 80 US cent barrier in the process. Reasons for this are clear enough and threefold.

Firstly of course the greenback has been under pressure against just about anything as markets wonder how much higher US interest rates are going to go. In second place comes a run of rather better Australian economic data. Thursday’s employment report was a real crowd-pleaser, showing, among other good things, a notable surge in full-time jobs. Lastly there’s China, where official growth figures came in ahead of expectations, raising Australian hopes that raw material demand from that quarter will be solid.