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AUD Weekly Outlook:Are Signs of Failing Stimulus An Ominous Sign For All?


AUD/USD Daily AVA FX Chart (06 dec 18)
Summary
 
Australian Dollar Outlook: Bearish
- Events: None of Note
- Australian Dollar Drops as Disappointing GDP Weighs on Rates Outlook
- If Stimulus Strategy Fails Here, Is The Rest of The Developed World Doomed?
- Meeting Minutes Show RBA May Pause Interest Rate Hikes in February
Analysis
While the Australian economy is still in better shape than that of the US, trading is all about expectations, and in recent weeks, the USD has outperformed as rising fear and improving fundamentals have boosted both safe-haven AND beneficiary of rising rate expectations. Meanwhile, the Australian economy has seen some disappointments. The Australian Dollar may continue to decline as the seemingly resilient economy reveals signs of weakness and the central bank’s rhetoric turns dovish, hinting that interest rate hikes may be off the table for the months ahead. The AUD is at the other end of the risk spectrum from the JPY, but like the Yen, it too may suffer from lower rate increase expectations relative to the USD.
Credit Suisse rate swaps reflect a belief among traders that 1-year RBA rate hike expectations suffered a major setback last week, dropping 23.6% to show that traders now expect borrowing costs add 100 basis points over the next 12 months, down a significant 31bps from the previous week. Furthermore, the priced-in probability of a rate increase in February (the next RBA policy meeting) declined to 41% versus a near-certain reading at 84% a week before.
The downturn in the interest rate forecast seems justified. Minutes from the Reserve Bank of Australia’s December meeting revealed that the central bank now reckons it has some “flexibility” on monetary policy having raised rates three consecutive times since October. Policymakers felt some ambivalence towards the latest increase, with the move to raise benchmark borrowing costs at 3.75% “materially shifting the stance of policy to a less accommodative setting.” Adding to the new dovishness, the third-quarter GDP report proved disappointing as the economy managed to grow just 0.2% (versus 0.4% expected). More disturbing, economic growth seemed to rest entirely on stimulus, as public spending surged 6.2% while private demand and exports floundered, leading investors to question how well the economy will perform once government cash dries up.
If this economy, the biggest success story thus far among the developed economies, can’t be saved by massive stimulus, what does that suggest for the rest of the developed world? If Keynesian spending doesn’t do the trick, then are governments out of bullets?
Events
The economic calendar offers no significant event risk, leaving the Australian Dollar vulnerable to further declines,  with next to no other catalysts other than its  diminished interest rate outlook. 
AUD/USD Daily AVA FX Chart (06 dec 18)
Summary
 
Australian Dollar Outlook: Bearish
 
- Events: None of Note
- Australian Dollar Drops as Disappointing GDP Weighs on Rates Outlook
- Meeting Minutes Show RBA May Pause Interest Rate Hikes in February
 
 
Analysis
While the Australian economy is still in better shape than that of the US, trading is all about expectations, and in recent weeks, the USD has outperformed as rising fear and improving fundamentals have boosted both safe-haven AND beneficiary of rising rate expectations. Meanwhile, the Australian economy has seen some disappointments. The Australian Dollar may continue to decline as the seemingly resilient economy reveals signs of weakness and the central bank’s rhetoric turns dovish, hinting that interest rate hikes may be off the table for the months ahead. The AUD is at the other end of the risk spectrum from the JPY, but like the Yen, it too may suffer from lower rate increase expectations relative to the USD.
 
Credit Suisse rate swaps reflect a belief among traders that 1-year RBA rate hike expectations suffered a major setback last week, dropping 23.6% to show that traders now expect borrowing costs add 100 basis points over the next 12 months, down a significant 31bps from the previous week. Furthermore, the priced-in probability of a rate increase in February (the next RBA policy meeting) declined to 41% versus a near-certain reading at 84% a week before.
 
The downturn in the interest rate forecast seems justified. Minutes from the Reserve Bank of Australia’s December meeting revealed that the central bank now reckons it has some “flexibility” on monetary policy having raised rates three consecutive times since October. Policymakers felt some ambivalence towards the latest increase, with the move to raise benchmark borrowing costs at 3.75% “materially shifting the stance of policy to a less accommodative setting.” Adding to the new dovishness, the third-quarter GDP report proved disappointing as the economy managed to grow just 0.2% (versus 0.4% expected). More disturbing, economic growth seemed to rest entirely on stimulus, as public spending surged 6.2% while private demand and exports floundered, leading investors to question how well the economy will perform once government cash dries up.
 
If this economy, the biggest success story thus far among the developed economies, can’t be saved by massive stimulus, what does that suggest for the rest of the developed world? If Keynesian spending doesn’t do the trick, then are governments out of bullets?
 
Events
The economic calendar offers no significant event risk, leaving the Australian Dollar vulnerable to further declines,  with next to no other catalysts other than its diminished interest rate outlook.
DISCLOSURE: NO POSITION