Australian Dollar US Dollar (AUD/USD) Exchange Rate Strengthens on Westpac Leading Index
The Australian Dollar to US Dollar (AUD/USD) exchange rate has seen marked volatility over the last few days as confidence in the antipodean currency fluctuated.
However, demand for the Australian Dollar (AUD) picked back up on Wednesday thanks to a modest uptick in the Westpac leading index for December.
As the six month annualised growth rate leap to 1.41% in December this encouraged greater market optimism in the outlook of the Australian economy, suggesting that economic activity picked up sharply at the end of 2017.
Naturally this prompted AUD exchange rates to rally, although the Australian Dollar struggled to gain particular traction against rivals such as the Pound (GBP) and the Canadian Dollar (CAD).
Even so, as Bill Evans, research analyst at Westpac, noted:
‘In our view there are still key negatives around housing, household incomes and the consumer which are likely to challenge the sustainability of any upswing in 2018.’
Trade War Concerns Weigh on US Dollar (USD) Exchange Rates
Concerns over US trade policy also helped to bolster the AUD/USD exchange rate overnight, with investors discouraged by the Trump administration’s tone.
Confirmation that the other eleven original members of the Trans-Pacific Partnership agreement have finalised a deal amongst themselves highlighted market concerns over the current US approach to trade.
Fears of an escalating trade war with nations including China and South Korea are likely to keep the US Dollar (USD) under some degree of pressure in the coming days.
Even with the temporary government shutdown now over political concerns continue to limit the strength of USD exchange rates, especially as recent Federal Reserve commentary has remained fairly dovish.
Australian Dollar Losses Forecast on Weaker Market Risk Appetite
In the absence of any fresh Australian data in the remainder of the week, though, the AUD/USD exchange rate may struggle to hold onto an uptrend.
Any increase in market risk aversion could see the Australian Dollar slump sharply, particularly if confidence in the Chinese economic outlook deteriorates.
Falling iron ore prices may also weigh on AUD exchange rates in the near term, with demand for the base metal diminishing markedly thanks to a persistent build-up in Chinese inventories.
Given the Australian economy’s continued reliance on its mining sector any persistent weakness here could dampen the current optimism of the AUD/USD exchange rate.
On the other hand, if the US Dollar remains soft the Australian Dollar is likely to benefit.
Forecast Dip in US GDP to Boost AUD/USD Exchange Rate
Friday’s US gross domestic product data is likely to provoke further volatility for the AUD/USD exchange rate, with forecasts pointing towards a slight easing in the growth rate.
If economic activity in the fourth quarter of 2017 does indeed falter from 3.2% to 3.0% this could give investors fresh incentive to sell out of the US Dollar.
However, so long as signs point towards the world’s largest economy maintaining decent momentum heading into 2018 the downside potential of USD exchange rates is likely to be somewhat limited.
US political developments will also remain a key influence on the AUD/USD exchange rate for some time to come.