© David Forrester
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I do believe that it will be a long-term pressure on the AUD/USD. The important thing here is that while we are seeing weaker data out of China, we still do not expect a lot on the part of policy makers in terms of large-scale policy stimulus of the likes we have seen in recent history. This is due to the fact that there has been a change in paradigm, when it comes to the Chinese policy making, with the change in the leadership. They are going to be more focused on quality of growth rather than quantity. Therefore, I assume it is a long-term factor for the Aussie.
Australia's CPI data came in below estimates leaving room for the RBA to lower interest rates at its next meeting on August 6. Do you personally anticipate a rate cut in the foreseeable future?
The important thing about the data is that while the headline inflation surprised to the downside, the underlying inflation measure, which is the average of the trimmed mean and weighted median, and which the RBA targets, actually was almost in line with the market and central bank's forecasts, just a little bit higher. Thus, I do not agree that it adds to the case for the rate cut, but we also do not think at this stage the data hinders it either. Given that we have had a weaker data out of China and Australia, we expect that there will be a rate cut in August.
What other drivers do you see in the foreseeable future to affect the Aussie?
One of the main drivers definitely will be China's economic data and how much weaker it becomes, as well as any policy response. The important thing to remember on a policy response is that it will likely to be very targeted and not of a large scale. Importantly, it probably will not be focused on public infrastructure projects, hence we will not see the usual commodity-hungry stimulus. Therefore, when it will be announced, it may give the Aussie a little bit of a bounce, but I doubt that it would last.
The other factor will be the RBA's rate decision. We do expect that they could cut rates by another 75 basis points to 2%, which is going to be a big factor weighing on the Aussie going forward.
Moreover, we cannot ignore the U.S. Dollar and the Fed. We anticipate that the Fed will begin tapering its asset purchases probably in December, but it could potentially happen in September. We look for a stronger U.S. Dollar in the second half of this year on the back of better U.S. economic data and the Fed begin to scale back its QE. That is also going to weigh on the Aussie Dollar.
What are your short-term and longer term forecasts for AUD/USD?
For the end of August we expect AUD/USD to be around 0.92 and 0.88 by the end of the year.