Sean Callow, Research Analyst at Westpac, suggests that the Australian dollar may still be suffering from the political turmoil and while AUD/USD bounced about 30 pips on Friday’s resolution of the Liberal Party leadership battle and extended its gains into the weekend as the US dollar weakened following Fed chairman Powell’s speech at Jackson Hole, it has struggled in recent days.
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“The Aussie should have benefited from China’s renewed commitment to support the yuan and from improved risk sentiment: the MSCI World Index has risen for 4 straight days. Given the better global risk mood, it makes sense that the safe haven Japanese yen is one of the softest in the G10 so far this week. But AUD is actually the weakest.”
“So perhaps uncertainty over the Australian political outlook remains a drag on AUD. But there have also been fresh negatives. My colleagues in interest rate strategy have for months been highlighting the risk that the rise in bank funding costs this year could see banks raise mortgage rates. Smaller banks had already done so but Westpac’s move drew lots of attention and sparked a fall in AUD/USD.”
“This was in line with the 4bp fall in Dec 2019 interbank cash rate futures, pricing in less risk of RBA tightening next year if private lending rates are rising. AUD fell again on today’s Q2 capex survey, where the slip in plant & equipment spending dampened forecasts for the key GDP data due Wed.”
“Still, AUD/USD should be able to avoid a break of the mid-August lows near 0.72 if Dollar Index continues to weaken. Speculators have built large long USD positions (using CME data) which appear to have been trimmed on catalysts such as Powell’s calm over inflation expectations and China’s firm steps on USD/CNY. We remain positive on USD on a 1-3 month view but lean towards a softer dollar in the week ahead against the likes of EUR, GBP and AUD.”
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