Australian dollar forecasted to weaken, but depreciation is unlikely to be agressive

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Category: Exchange Rates

Published on Monday, 03 December 2012 10:34

Written by Sam Coventry

The Australian dollar (Currency:AUD) has begun what promises to be a significant week firmly on the back-foot:

The pound to Australian dollar exchange rate is 0.32 pct higher on Friday night's close at 1.5409.

The Australian dollar to US dollar exchange rate is 0.06 pct lower at 1.0421.

Hamish Pepper at Barclays is forecasting weakness for the Australian currency this week courtesy of an expected interest rate cut at the Reserve Bank of Australia, but demand should keep a floor under the AUD:

"With interest rate markets pricing 18bp of cuts and analysts split between no change and a cut, the 25bp RBA rate cut that we expect this week is likely to narrow Australia-US interest rate differentials and place downward pressure on AUD/USD.

"That said, we do not expect aggressive depreciation in the AUD, with continued real-money demand for high-quality and relatively high-yielding AUD assets providing some support. These factors point to AUD/USD trading in a relatively tight range with a downward bias."

Behind the immediate AUD losses we see "weak Australian retail sales data last night reminded the Reserve Bank of Australia of the merits of another interest rate cut, ahead of its decision in the early hours of tomorrow morning. Aussie jobs data was also weak," says Richard Driver at Caxton FX.

Concerning the RBA's likely actions Driver says: "It is a close call again this month but we think the RBA will elect to reduce its 3.25% interest rate by 0.25%, which should help sterling to acquire some further gains."