Fundamental Australian Dollar Forecast: Neutral

The Australian Dollar is still being driven largely by interest-rate differentials between its home country and those of the US.

At face value those still help its big, US brother. After all the Federal Reserve is still widely expected to tighten monetary policy in December. Meanwhile futures markets don’t see Australian rates rising from their current, record-low point until well into 2018. That means US and Australian rates will match by year-end and the Aussie will lose its yield premium, assuming the Fed sticks to the script.

Sure enough, AUD/USD has been in retreat since topping out at 2017’s high in early September. However, last week saw a little readjustment in the Aussie’s favour. A survey of consumer confidence came in strongly, for one thing. It lacked immediate currency impact but, in the context of remarks from Reserve Bank of Australia policy board member Ian Harper this month, was still important. Harper shocked markets by saying that Australian interest rates could yet go lower if consumer vigour were to wilt. In one respect he was simply stating the obvious but markets had been sure that the next move, when it comes, would be a rate hike. They still think it will be, on balance, but nevertheless is comments hit the Aussie.

However, those consumer numbers show Australians still ready to spend. As long as they are, Harper’s contingency won’t be triggered.

The Australian Dollar got another lift last week from domestic inflation expectations, which moved higher this month. There was a bit of contrast here with the US, where Fed officials wondered whether weaker inflation might not be more entrenched than they had thought. The RBA’s Financial Stability Review was also upbeat about the economy’s prospects even if worries about consumer debt rightfully endure at the central bank.