[DanRath]

The AUD remains vulnerable given the domestic economy has stalled and the market is frankly unprepared for interest rate cuts, which some consider a strong probability in the months ahead. The World Bank global growth downgrade this week temporarily refocused the markets towards the ongoing global economic malaise, reigniting the risk aversion trade to the point where the AUD has tended to be flat to weaker.

Analysts expect sour data and inflation printing persistently below the RBA target band to provide triggers for RBA to lower the cash rate from the current lofty 3% rate. Hence, the AUD is expected to significantly underperform, but more so against the crosses than against the USD.

Many investors are being sidetracked by upbeat monthly data such as retail sales, building approvals, home sales and consumer sentiment. But just as the commodity price boom eventually affected all Australians for the better, the continued retrenchment in the business sector will dampen employment and spending patterns going forward. The bad news is coming.

A raft of data in the next two weeks will turn attention back to the state of the Australian economy. Retail sales for May will reflect a “dropping out” of the Government’s fiscal stimulus cheques, and skilled vacancies will highlight the poor employment outlook. Any downside surprise to these or the data on credit and building approvals risks undermining the AUD. With inflation for Q2 released in July, the focus of the market should be on the RBA undershooting the inflation target for a prolonged period, edging the Bank closer to lowering the cash rate further. This is where the AUD underperformance is likely to intensify.