Difficult route: A shopper (right) pays for food with an Australian 50 dollar note at Paddy’s Markets in Sydney. Although the Aussie dollar will struggle to rally significantly, it may finish the year at 68 US cents, says a senior strategist at Credit Agricole. — Bloomberg
MELBOURNE: Traders hoping the Australian dollar will strengthen beyond a closely tracked level are set to be disappointed as optimism over China’s rebound fades and the local economy falters.
The currency has risen over 2% in May, potentially heading for its best month this year.
However, it may struggle to rally further as Australia will be reluctant to raise interest rates and China continues to underwhelm with its economic support, analysts said.
Such headwinds signal that the Aussie dollar will likely once again fail to break through the key resistance of 69 US cents and reach its post-pandemic high, a level that it didn’t manage to surpass three times last year, according to InTouch Capital Markets.
The currency closed at 66.28 US cents last Friday.
“A number of stars would have to line up” for the Aussie to test 69 US cents, said Richard Grace, a senior strategist at InTouch in Sydney.
“It’s worth noting that it has struggled to breach that level when tested,” he said.
When the Aussie tested the 69-cent level last year, the currency was weighed down by a drop in commodity prices on concerns about China’s economy and a hawkish Federal Reserve, which supported the US dollar.
This time, commodities are slipping from highs, while an index tracking the greenback’s strength notched its best week in more than a month as Fed officials signalled inflation has to ease more before they’ll consider a rate cut.
Traders also see the Reserve Bank of Australia (RBA) removing its hawkish bias as consumer spending slumps and cracks emerge in the labour market.
Swaps data showed the central bank will remain on hold for the remainder of the year, marking a rapid reversal after pricing showed earlier this month there was an even chance of a rate hike in August, following a hotter-than-expected inflation print.
“High interest rates and rising prices for healthcare, education and housing are squeezing out retail purchases,” Bloomberg Economics said.
“Consumer spending will probably stay weak, with the RBA likely to keep rates on hold into the second half of the year.”
Still, the Australian currency is unlikely to slump from here as it remains supported by non-dollar crosses, while short bets will be pared due a central bank that may be among the last to cut interest rates, Bloomberg Economics added.
Although the Aussie dollar will “struggle to rally significantly”, it may finish the year at 68 US cents as sentiment towards China starts to stabilise, said David Forrester, a senior strategist at Credit Agricole CIB in Singapore. — Bloomberg
