© Antje Praefcke
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We have seen quite strong swings in the Aussie, because over the past couple of weeks risk aversion has weighed heavily on the Australian Dollar. Actually, a lot of people had expected a 50 basis points rate cut yesterday, but RBA delivered only 25 bps cut. That was the first point to buy back the Aussie and push it higher. Then we saw very strong Q1 GDP data in Australia this morning, which pushed the Australian Dollar even further to the 98.77 level, thus we are approaching the 99 level in the Aussie against the US Dollar.We have seen two important events in the Australian Dollar. Currently the market is focusing again on the market sentiment and risk aversion, which means that we have seen almost stabilization of the market sentiment, implying that the Aussie can hold well and maybe even try to touch the 99 level against the US Dollar. However, the overall situation around the Eurozone debt crisis remains rather uncertain, which means the markets are nervous, thus market sentiment will remain fragile.
I expect Aussie Dollar against the US Dollar to run out of steam around 99 level, afterwards we might see a retracement and new loses in Australian Dollar in case risk aversion rises strongly again.
Do you expect further interest rate cut this year?
We do not exclude further interest rate cut. I think the RBA was very clever to remain cautious yesterday and to cut only by 25 bps not by 50 bps, what a couple of analysts and market participants had expected. I think depending on the further developments of the Eurozone debt crisis and also on the Chinese economic performance, the RBA will remain cautious concerning further rate cuts, because it knows that one part of the economy (booming mining sector) is running really well, and we have seen the other part of the economy (business investment and private consumption) in the Q1 being muted, which means that there is a two-way economy. I believe the RBA will remain circumspect with further rate cuts, but in case we are going to see deepening of the Eurozone debt crisis or there is going to be further deterioration of the outlook for the Chinese economy, then the RBA will act again and will cut its interest rate by 25 bps. It is going to have a closer look to the further developments in the global economy.
What is your outlook for AUD/USD for the Q3 and for the end of this year?
Actually, I expect the Australian Dollar to trade in a quite wide and volatile range, but against the US Dollar in a sideway range. I think due to elevated risk aversion and the problems in the Eurozone, there is a limited upside potential for the Australian Dollar. Therefore, we will not sustainably trade above the parity in the short term. I think some actions from the ECB or from the politicians in the Eurozone may support market sentiment and may shortly push it above parity. Overall, the crisis in the Eurozone will remain the driving factor in the market, and risk aversion will remain high. Therefore, I still see the downside risks for the Australian Dollar, which means that from now until the end of the year there is going to be a wide range between 94 and parity level.