After ending the day flat, the Australian dollar is currently selling off sharply. Despite weakness in the US dollar and strength in industrial commodities such as iron ore and copper, the Aussie is down. Recent strength in 2-year US government bonds yields means that the interest rate differential versus 2-year Australian government bonds is almost zero. While the Australian dollar was supported by relatively higher yields in the past, this is no longer the case today. Our short-term outlook on the Australian dollar remains bearish, with the caveat that the currency is starting to look oversold.
AUD/USD is currently trading just above 0.7550. Looking at EUR/AUD, the pair is currently just above 1.560. The GBP/AUD exchange rate is currently above 1.7520.
This week’s economic data contains consumer confidence, employment and consumer inflation expectations. NAB business conditions were stronger than the last print (21 vs. 14 prior) as were confidence figures (8 vs. 7 prior). Westpac Consumer Confidence numbers were weak (-1.7%) while wage growth missed expectations (2% vs. 2.2% expected). Employment changes (3.7k vs. 17.5k expected) and the participation rate (65.1% vs. 65.2% expected) both missed expectations. On the positive side, unemployment was better than expected (5.4% vs. 5.5% expected). Last week, the RBA maintained its cash rate (1.5%) while suggesting a weak outlook for inflation.
After weakening sharply in the latter half of October, we are downgrading the Australian dollar further to bearish. The currency is weak thanks to lower-than-expected inflation rates and falling Australian bond yields. Looking at a weekly chart, the Aussie has re-entered normal trading conditions having been overbought for most of September. Our analysis is based on various technical indicators.