Fundamental Forecast for Australian Dollar:Bearish

The Australian dollar bounced back from a fresh monthly low of 1.0052, but the high-yielding currency may face additional headwinds over the following week should the central bank talk up speculation for lower interest rates. Indeed, Treasurer Wayne Swan said the Reserve Bank of Australia has ‘room to move’ on monetary policy in light of the slowing recovery, and the central bank may continue to scale back the rate hikes from the previous year as the downturn in global growth dampens the outlook for the isle-nation.

The Reserve Bank of Australia meeting minutes highlights the biggest event risk for the following week, and the statement may reveal an increased willingness to deliver another rate cut in December as the central bank aims to encourage a sustainable recovery. According to Credit Suisse overnight index swaps, market participants see at least a 25bp rate cut next month, while investors expect borrowing costs to fall by nearly 150bp over the next 12-months as the central bank curbs its economic assessment for the region. Speculation for lower interest rates is likely to dampen demands for the high-yielding currency, and we may see the RBA extend its easing cycle into the following year as the uncertainties surrounding the world economy instills a weakened outlook for the region. However, the high-yielding currency push higher over the following week should the rise in market sentiment gather pace, and the reaction to the fundamental developments may be short-lived as risk trends continue to dictate price action in the foreign exchange market.

As the AUD/USD pares the decline from earlier this month, we may see the exchange rate threaten the 200-Day SMA at 1.0417, but the moving average may continue to hold up as resistance as the pair appears to be carving out a head-and-shoulders top. Should the bearish pattern play out over the following week, we may see the aussie-dollar fall back below the 38.2% Fibonacci retracement from the 2010 low to the 2011 high around 0.9930-50, and the pair may threaten the rebound from 0.9390 as interest rate expectations falter. - DS