Australian Dollar Outlook: AUD Undermined by USD as Fed Hikes All Priced In

[MongiIG]

AUSTRALIAN DOLLAR FORECAST: NEUTRAL/BULLISH

• The Australian Dollar has steadied going into the long weekend
• A hawkish Fed has multiple rate hikes coming while RBA sidelined
• US Dollar looks to steering AUD/USD for now

The Australian Dollar was caught in crosshairs of external factors through the week just passed. Between the US Dollar gyrations and commodity market volatility, the Aussie went along for the ride without any domestic influences of note.

The fundamental backdrop for AUD remains solid, although it is not showing up in all of data at the moment.

The unemployment rate came out last Thursday and printed at 14-year lows for the second month in a row in for March. Strong.

However, the trade data from the week before showed that exports were flat, while imports rose, reflecting a domestic economy spending healthily.

The spot prices of commodities that Australia export have been rising steadily in the spot market. The bulk commodity contracts take time to roll off and be re-negotiated. This will unfold in the coming quarters and higher export values appear likely.

CPI is another piece of data yet to reflect the current conditions. Australia is in the midst of a federal election campaign and both of the major political parties are trying to impress their economic management credentials.

Astoundingly, both sides of the aisle have repeatedly refused to fund the Australian Bureau of Statistics (ABS) to provide the RBA with monthly inflation data. Instead, they get quarterly reads on what is going on in the economy.

Of the G-20 nations, Australia and New Zealand are the only 2 nations that do not provide monthly CPI figures. At least New Zealand provide a monthly food price index.

If either party truly understands how the economy works, it seems obvious that the ABS should be funded to provide monthly CPI. Especially given that the Federal Government mandates the RBA to an inflation targeting regime.

None the less, Australian first quarter CPI will be released April 27th and the next RBA meeting is May 3rd.

A high CPI could prompt the RBA into action, which would be supportive of the Aussie. Until then, it is at the whim of external influences and further weakness cannot be ruled out.

The Ukraine war continues to create uncertainty in markets and the US Dollar is enjoying safe haven status. At the same time, commodities are going higher. This a conundrum for AUD direction.

The Federal Reserve has stepped up their rhetoric on rate hikes over the last fortnight. This has seen the USD strengthen, pushing down AUD/USD. This might be the key driver over the next week. It’s hard to imagine the Fed being any more hawkish.

If markets think they have priced in all the hikes over the near-term horizon to the end of this year, then it may undermine USD to certain extent.

Chart created in TradingView

Written by Daniel McCarthy, Strategist for DailyFX.com. 15th April 2022