AUD forecast update: Stronger for longer; Fed dependent

• The Australian dollar has opened this week close to 0.76 US cents, having lost some ground last week amid warnings from several key Fed speakers that the market is under-pricing the chances of a Fed rate hike this year

• NAB’s forecast calls for a Fed rate rise before the end of the year; very recent senior Fed commentary suggests a rate rise could come as early as the September 22 FOMC meeting

• Fed Vice Chair Stanley Fischer said yesterday that core inflation is “within hailing distance” of the 2% target and that employment had increased “impressively” since its nadir in 2010.  Last week, Fed President Bill Dudley warned the market was too complacent on Fed pricing, agreeing to a question that a September rate rise is “possible” while Fed President Williams called for a rate hike “sooner rather than later”

• The US dollar will struggle to gain the traction we have been looking for while the Fed continues to hold fire on proceeding with policy normalization.  This week will likely be important for USD sentiment after last week’s pointed comments and with Fed Chair Yellen speaking on Friday

• With no further RBA cuts expected this year, the AUD now looks unlikely to fall much if at all before late 2016 and assuming the Fed moves in December as NAB expects

• We still project a significant fall in 2017, aided by further RBA easing, falls in Australia’s Terms of Trade and a modestly stronger US dollar

• Given NAB’s forecast for a growth slowdown come 2018 and a delayed tightening cycle, the eventual low in the AUD is still seen sub-0.70

• The week ahead: The annual Jackson Hole Fed/global central bankers’ economic symposium starts Thursday night and runs over next weekend with Fed Chair Yellen speaking on Friday on “The Federal Reserve’s Monetary Policy Toolkit”. It’s a light data week here and offshore.  Locally, the biggest report is Wednesday’s June quarter investment partial Construction Work Done ahead of Q2 GDP a fortnight later.