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In 2016 the Australian dollar (AUD) has benefited from the recovery in commodity prices, but lost grounds at the end of the year to post U.S. Presidential election rally in U.S. Dollar. We expect this to continue even in 2017 following the Federal Reserve’s optimism on three interest rate hikes and President Donald Trump’s fiscal policies.
Thereby, we foresee that the AUD/USD to hit lowest since March 2009 by the end of the fourth quarter and trade at around 0.65.
However, the fundamentals supporting Australian dollar are favourable in 2017, keeping economic growth well above 2.5 percent mark. Also, recovery in commodity prices including energy post-OPEC deal will lend further support to the growth trajectory. Interestingly, the Australian economy will remain sensitive to the Chinese grounds as it is the largest export markets for the Aussies, which accounts 32 percent of total exports.
The easier monetary policy has helped to bolster country’s demand, as the Reserve Bank of Australia reacted to sub-target inflation by cutting the official rate by 50 basis points during the last year to 1.50 percent. Additionally, the RBA’s policy stance in 2017 will completely depend on the developments in consumer inflation and in the event that the Australian dollar appreciates.
Moreover, it is worth noting that the heavy sell-off in Australian dollar (AUD) is mainly because of Donald Trump’s fiscal spending appeal, which is expected to be financed from government borrowing and not because of growth in U.S. economy.
If Trump successfully implements his fiscal plan, consumer inflation will surely rise, giving the Federal Reserve wider space for an interest rate hike. Thereby, rising Fed fund rate will increase the cost of borrowing. After the Presidential election result, AUD witnessed a massive selling against U.S. dollar, sending the AUD lower by 8 percent to 0.715 in just a month’s time.
