Threat
• AUDUSD: Candles Point to Renewed Selling

The Australian dollar came under pressure as the central bank lowered the benchmark interest rate by another 25bp in December, and the high-yielding currency is likely to weaken further as the fundamental outlook for the isle-nation falters. The economic developments on tap for the following week instills a bearish view for the aussie as we’re expecting to see the housing market deteriorate further, while the trade surplus is anticipated to narrow for the second consecutive month in October.

As the RBA sees an increased risk of a ‘material’ slowdown in global growth, we expect the central bank to carry its easing cycle into the following year, and we may see the board take aggressive steps to shore up the ailing economy as Governor Glen Stevens talks down the risk for inflation. As price pressures subside, we should see the RBA show an increased willingness to ease policy further in 2012, and speculation for additional monetary support is likely to dampen the appeal of the high-yielding currency as Governor Stevens adopts a highly dovish tone for monetary policy. According to Credit Suisse overnight index swaps, market participants still see borrowing costs falling by another 125bp over the next 12-months, and speculation for a slew of rate cuts is likely to produce additional headwinds for the Australian dollar as policy makers step up their efforts to shield the economy. In turn, the short-term reversal from December high (1.0379) looks poised to gather pace in the week ahead, and we may see the AUD/USD give back the rebound from the end of November as the pair appears to have carved out a near-term top.

As the AUD/USD fails to trade above the 23.6% Fibonacci retracement from the 2010 low to the 2011 high around 1.0350-60, it seems as though there’s a lower high in place, and we could see a lower low heading into the following year as the outlook for 2012 turns increasingly bleak. However, as risk trends continue to dictate price action in the foreign exchange market, a rise in market sentiment could prop up the high-yielding currency, and we may see the exchange consolidate ahead of the slew of event risks as global policy makers increase their efforts to address the turmoil in the world economy. – DS

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