The Australian dollar pulled away from the recent slump, however, gains are expected to be limited as the private capital expenditure went down. Foreign exchange specialists agreed that the currency is significantly overvalued as Australia keep its Triple A credit rating which could be one of the reasons of a bearish trend for the currency.
Capital Expenditure
Attention was placed on the result of quarter private capital expenditure for March which declined by 5.2 percent, according to the Australian Bureau of Statistics. The data set the vibes for the Australian GDP and to where it is heading considering the business investment and the financial expectations.
Relatively, the spending on equipment, plant and machinery advanced 0.1 percent to $11.54 billion.In the previous quarter, capital expenditure or CAPEX rallied 0.5 percent to $31.941 billion recovering from the 9.2 percent drop in the third period of 2015.
It is a bit unexpected that the market has been focusing on these figures. In the past, the CAPEX does not have a big impact on the Australian currency. The capital expenditure data does not usually affect the decision of the Reserve Bank of Australia to amend the interest rate.
Apart from the low inflation, the market usually pays attention on the statement and policy modifications of the Federal Reserve and the significant U.S. economic data.
Credit Rating
Meanwhile, the sovereign ratings have been playing a big role in the currency markets. Typically the market focuses in the quality of the sovereign as they seek for the safety of the Aussie as a haven currency. The Australian currency is vulnerable to the Fed interest rate changes as the Australian bonds become less attractive when the central bank cut rates.
Foreign exchange specialists warned that as the country gives more attention to its credit rating the reported weakness of the Australian dollar in 2000-2001 might come back anytime soon.
Reserve Bank of Australia
If the Reserve Bank of Australia will cut its interest rates to 0 percent or even lower, the Australian dollar will remain on the downside. Analysts expect the Aussie to head towards 50 cents as its de facto safe haven status disappears.
Earlier this month, the bank cut the cash rate by 25 basis points and the experts bet it would go for 1 percent during the end of the second quarter in 2017. Last Tuesday, RBA governor Glenn Stevens confirmed to lower rates again to drive inflation higher as the bank keep its commitment to the inflation targeting monetary policy framework.
On the other hand, a forex strategist from Westpac explained that the Australian dollar will dodge the 60s in the month ahead relies on a steady hand at both the Fed and RBAand if the Fed doesn’t deliver a hike in June and the RBA doesn’t cut, then Australia’s dollar keeps some yield insulation for now.
For the investors
Although the Aussie is expected to fall further in general, other analysts still believed that it won’t fall that much, but the currency being overvalued against the greenback is palpable. Investors are advised to acquire greenback and invest in U.S. listed companies as long as they are willing to take the risks associated with investing offshore. Local investors gain in investing with these U.S. companies as the bearish Aussie lifts their respective profit.