Optimistic developments in the economy throughout the second half of 2015 created a multitude of tailwinds for Australian policymakers after aggressive actions taken earlier in the year saw gains trickle down to the real economy. However, despite the positive momentum in employment and growth, risks in the housing sector combined with inflation below the Central Bank target may see policy remain accommodative for some time to come. This contrasts with rising speculation that the US dollar may be set for a turnaround even though key FOMC voting members have taken a dovish turn in recent comments. While US fundamentals continue to point to a sluggish recovery, investors clamoring for haven assets might shift gears away from yield towards quality in an effort to hedge against growing volatility, boding poorly for the AUDUSD pair.
Fundamentally Speaking
Although both countries are systemically important on a global basis, a side-by-side comparison of the US and Australia is challenging considering the substantial differences in scale and breadth of the economies. For one, Australia is heavily sensitive to the export economy, an area that has experienced substantial shrinkage over the last year especially due to substantial exposure to Asia. Exports to China account for 27.00% of the total, have fallen dramatically from 2013 highs, mainly due to reduced demand for key natural resources such as iron ore and coal. Although the rapid devaluation of the Australian dollar over the last year managed to offset the losses in trade and insulate the economy which grew by 2.50% on an annualized basis through the end of the September, the problem forward is commodity demand. Unless Asian economies are able to recover during 2016, the outlook for Australian interest rates is increasingly negative.
Across the Atlantic, US exports have also fallen due to a stronger dollar driving up the costs of American goods on a relative basis, denting demand. However, unlike Australia, the US economy is far more diversified and consumption dependent. Gains in job creation have seen the unemployment rate decline to 4.90% in the latest reading, compared with 5.20% in Australia, but more concerning in the US is inflation which remains well below the Federal Reserve’s target. While headline consumer prices in the land down under grew by 1.70% in 2015, the equivalent US figure was a paltry 0.70%, underlining concerns for policymakers and raising speculation that the Fed will have to reverse course in December. While ultimately this would be dollar negative, near-term the Dollar will likely see demand pickup as investors opt for perceived safety amid higher volatility.
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