Australian Dollar Wobbles But Won’t Fall Down

Fundamental Forecast for the Australian Dollar: Neutral

The Aussie has ridden out one tough week

If it gets another, it may ride that out too

The RBA probably has the Fed on its collective mind

The Australian Dollar has held up rather well given a week of domestic data which might well have tried bulls’ patience. So it’s tempting to suggest that, if first-tier data didn’t knock the currency too hard, then this week’s generally second-tier releases won’t either.

And the currency had a lot to ride out.

The Lucky Country’s third-quarter Gross Domestic Product release tested that particular sobriquet almost to destruction, with growth coming in way below what markets had expected. Then came some more bad news, in the form of an unexpectedly yawning trade gap.

But look at the Aussie. AUD/USD started this week at 0.74558. It looks set to end it little changed, despite all of the above.

However, this fundamental vigor has its roots in three factors. The first is interest-rate support. Financial markets do not at this stage believe that the Reserve Bank of Australia will be cutting their Cash Rate much below the current record low of 1.5%. That’s if they opt to cut it at all. Even at record lows Australian rates still look pretty tempting to those who want developed-market, solid-credit-rating exposure. Objectively 1.5% isn’t much, but it’s more than you get across the US, much of the Eurozone or the UK.

The second is a bit of seasonality. Weaker third quarters are not wholly uncommon in Australia, or indeed in other developed economies. They often set the stage for a holiday-backed fourth quarter fightback. According to wire reports, analysts still expect that we will get one, and that the shock growth contraction seen in the quarter to September will not morph into Australia’s first technical recession for more than twenty-five years.