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- Westpac Consumer Sentiment shows deterioration in sentiment.

- Analysts say it's a sign of things to come, negative omen for economy.

- DBS Bank and HSBC say sell AUD as domestic outlook is deteriorating.

The Australian Dollar took a steep fall in the Westpac Consumer Sentiment index in its stride Wednesday but selling the Antipodean currency is still a "top ten" investment idea for the 2019 year, according to analysts at DBS Bank.

DBS says the Reserve Bank of Australia (RBA) may have to abandon its commitment to raising interest rates next rather than cutting them, in light of recent domestic economic data.

Australian consumer confidence plummetted by -4.7% to 99.6 in Janauary, according to the Westpac index, which is its largest one-month fall since the September of 2015 when financial market volatility and weakening growth data cast a cloud of gloom over the economy.

The Westpac index is now sat below the key 100 level, which means pessimists are outnumbering the optimists down under, with consumers less confident in their prospects for both the short as well as long term. Consumer confidence about family finances also deteriorated notably too.

"The falls follow volatile equity markets in December and early January, heightened media attention around the deteriorating housing market and some talk of lower official cash rates. Up until the January reading consumer sentiment was holding above its long term average. One of the transmission channels for dwelling price falls to the economy is through weaker consumer sentiment," says Joseph Capurso, a strategist at Commonwealth Bank of Australia (CBA).

Capurso and the CBA team attribute much of the fall in confidence to events in the housing market.

House prices have fallen sharply in many of Australia's major cities of late, posing a threat to the economy given the impact they can have on household confidence and the willingness of consumers to spend.

New South Wales and Victoria both saw steep falls in confidence and are both provinces that have experienced the greatest declines in house prices too.

"The weakening in consumer sentiment will be unsettling for the RBA given its concerns about downside risks to the outlook for consumer spending. With the disappointing September quarter national accounts update materially lowering the starting point for growth and consumer momentum looking softer, the Bank is likely to lower both its 2018 and 2019 growth forecasts," warns Matthew Hassan, an economist at Westpac.

Hassan says weaker consumer confidence and slower growth will mean the Reserve Bank of Australia (RBA) is forced to keep its interest rate on hold at a record low of 1.5% through both 2019 and 2020.

This will be bad for the Australian Dollar, especially if central banks elsewhere continue to lift their rates over the same period, because it will mean the yield advantage over rivals that is enjoyed by Aussie government bonds and the currency will continue to be undermined.

An unfavourable shift in the bond market, brought about by a combination of RBA and other central bank interest rate policies, was responsible for much of the loss sustained by the Australian Dollar during the first half of 2018.

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted -0.10% lower at 0.77199 Wednesday but is up 2% for 2019, while the Pound-to-Australian-Dollar rate was 0.08% higher at 1.7877. The Aussie was a fraction lower against all G10 currencies other than the Kiwi Dollar for the session.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

"AUD/USD will remain weak and trade in a lower 0.65-0.70 range in 2019 on a further deterioration in Australia’s negative interest rate differential against the US. We see two increases in the Fed Funds Rate totalling 50 bps to 3% or double the level of its Australian counterpart," warns Philip Wee, a currency strategist at DBS Bank in Singapore.

Like Wesptac, Wee and the DBS Bank team forecast the RBA will holds its interest rate at 1.5% in 2019. Only they also project the Federal Reserve and other central banks will lift their own rates, which should see the Australian Dollar come under pressure once again in what could soon become a rerun of the first-half of 2018.

Wee, like Westpac, also says the RBA will be forced to downgrade its growth forecasts next month. He forecasts the economy to slow over the next two quarters, taking the annualised pace of GDP growth below 3% temporarily, but the RBA's current forecasts imply an annualised growth rate of 3.5% this year.

"Falling house prices have led consumers (especially heavily indebted mortgage holders) to tighten their wallets and led to a slump in construction activities," Wee writes, in a briefing to clients. "The negative spill-over effects into business confidence and investment expectations were evident in recent surveys."

This and external pressures such as pessimism over the outlook for the Chinese economy are likely to weigh on the Australian Dollar over coming months, leading Wee to advocate that DBS clients sell the currency. The Aussie is underwritten by Australia's mammoth commodity trade with China.

Wee's idea is in line with the view and recommendations given by the research team at HSBC this January too. They say that a weak inflation number for the fourth quarter, resulting from a soft economy, will put a severe dent in the Antipodean currency.

"Global factors have already triggered a considerable rally but the coming weeks may provide greater headwinds from the domestic front," says Tom Nash, a currency strategist at HSBC in Australia. "A soft inflation reading for Q4 would keep it entrenched below target. If the RBA meeting offers any suggestion that the central bank is less confident the next move in rates is more likely to be up, the AUD would likely crack lower...Sell AUD-USD at 0.7180".

Poor inflation figures could easily encourage the market to speculate more heavily that the RBA will eventually be forced to cut its interest rate in 2019 in order to encourage a pick-up in inflation.

Changes in interest rates are normally only made in response to movements in inflation but impact currencies through the push and pull influence they have on capital flows and their allure for short term speculators.

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