Australian markets are tipped to open lower this week, erasing Friday’s gains, after a flat result on Wall Street.
But the focus will be on the United States’ Federal Reserve which is expected to drive down the Australian dollar when it announces another interest rate hike.
‘It looks like we had a rally on Friday and we’ll give up most of that,’ AMP Capital’s chief economist Shane Oliver told AAP on Sunday.
That’s because, despite European shares briefly rallying on Friday along with the Dow Jones – up 0.3 per cent – tech stocks dropped half a per cent and dragged down the other markets.
The lacklustre result was in part due to technical reasons, Dr Oliver said, which triggered a sell-off as US markets closed.
The Australian futures contracts market is now pointing down 23 points, a decline of about 0.4 per cent meaning the market is expected to reverse Friday’s gains when it opens.
‘There’s this ongoing worry about trade which is causing this consternation in investors,’ Dr Oliver said.
Namely, US President Donald Trump’s tough talk on China which is still hanging over the market.
The president’s deregulation has been good for US markets, and rubbed off on Australia’s, Dr Oliver said – but the escalating trade war with China poses an ongoing threat.
All eyes will shift to the Federal Reserve Bank in the United States when it meets on Wednesday – local time – and likely raise interest rates to between 2 to 2.25 per cent.
‘All things being equal it’s why the Aussie dollar has been falling over this year,’ Dr Oliver said.
‘Our Reserve Bank is on hold which makes it more attractive to park money in the US.’
Dr Oliver is tipping the Australian dollar to continue dropping, reaching about 70 US cents by the end of the year. He says it would remain weak from there, potentially dropping into the high-60s early next year.
He said Australian interest rates won’t move because the weakening housing sector – particularly in Sydney and Melbourne – will continue to fall for the next few years.