- 'Risk off' market phase to weigh on AUD

- Australia’s coal and iron ore earnings at risk

- RBA wants to push back on 'least dovish' reputation

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GBP/AUD spot rate at time of publication: 1.8057Bank transfer rates (indicative guide): 1.7425-1.7550Transfer specialist rates (indicative guide): 1.7626-1.7894More information on specialist providers, hereThe Australian Dollar is forecast to decline over the course of the coming six months by foreign exchange analysts at Rabobank, whose recent research cites a combination of RBA policy shifts, peaking iron ore and coal demand and the expectation for a broader 'risk off' phase to weigh on global markets.

These forces already appear to be taking a hold of the Australian Dollar which has started to underperform its major peers over recent days, eroding the currency's strong performance in 2020.

"We see scope for AUD/USD to pullback," says Jane Foley, Senior FX Strategist at Rabobank.

The Australian Dollar had been flying high heading into September, catching the coattails of rising commodity prices and equity markets which benefited from substantial central bank stimulus and a rebound in Chinese growth and trends that suggested Europe had passed the worst of the covid-19 pandemic. "In recent months the AUD has been buoyed by the rebound in industrial activity in China and by strong prices for iron ore in particular," says Foley.

A deterioration in risk sentiment amongst global investors is being widely cited by foreign exchange analysts for the Aussie Dollar's recent turn lower, "the world is becoming accustomed to the notion that measures to contain covid-19 will be with us for longer," says Foley.

In addition to Covid-19, Foley says "uncertainty around the US election, disappointment about the timing and size of US fiscal stimulus and/or China related tensions are all risk factors" to sentiment and Australian Dollar valuations.

September has seen something of a sea-change in investor sentiment, with stock and equity markets turning lower which has in turn prompted a weaker Aussie. The Australian-to-U.S. Dollar exchange rate peaked at 0.7413 on September 01 before turning lower, it is now back to levels last seen in July at 0.7043.

The Pound-to-Australian Dollar exchange rate has meanwhile turned higher since mid-September as Sterling shakes off its Brexit anxieties amidst ongoing progress towards a post-Brexit trade deal. The pair has recovered from a multi-month floor at 1.7494 to quote at 1.8048 at the time of writing.

Looking at the Aussie Dollar's performance over the past month, we see it has fallen against all but three of its G10 peers:

Above: AUD performance over the course of the past month

The commodity market has seen prices fall over recent weeks as fears for a slowdown in the global economic recovery take hold and Brazilian iron ore production comes back on line following severe disruption in the first half of 2020.

"Historically the AUD has been sensitive to the oil price due to its coal and gas exports which have previously been seen as substitute goods. Additionally, lower prices for oil is often the result of expectations of weak global demand with may impact Australia’s coal and iron ore outputs more directly," says Foley.

Image courtesy of Rabobank

The Reserve Bank of Australia (RBA) is meanwhile seen as an additional source of potential weakness, with a number of foreign exchange analysts saying policy makers will be keen to row back on a view held by markets that it is the 'least dovish' amongst its peers.

The general rule of thumb in currency markets is that the more dovish a central bank, the weaker its currency. Much of the Australian Dollar's strength in mid-2020 was in part a result of the RBA filtering on the less dovish side of the spectrum.

But the RBA looks keen to push back on this view, noting that the stronger Australian Dollar can be a headwind to the nation's economic recovery as it lowers the returns earned by exporters.

RBA Deputy Governor Guy Debelle this week sparked some Australian Dollar weakness when he delivered a speech touching on the value of the Australian Dollar, and the question of whether negative interest rates could be introduced.

Debelle said a lower exchange rate would "definitely be beneficial for the Australian economy".

"AUD bulls may decide to take this as a shot across the bows, though the warning may only have teeth if the prospects of another RBA rate cut increases," says Foley.

Expectations for a 'mini' RBA interest rate cut over coming weeks have grown this month, which has corresponded with the fall in the currency.

Westpac said Wednesday that it expects the cash rate to be cut to 0.10% in October while NAB has also offered a similar view, and there’s a danger the RBA could now be forced to do exactly that or else risk a doubtless-unwelcome rally in Australian Dollar exchange rates.

Investors have already priced-in an RBA rate cut to -0.08% for October so if one is not delivered the bank might lift the Aussie as the bond and derivative markets adjust, just as policymakers are becoming concerned about currency strength.

"It is conceivable that the RBA could cut this potentially to 0.1%. Whether or not this happens depends crucially on labour market, wage and price developments in the coming months. However, with so much slack in the global economy, we would judge that such a move could be considered as ‘likely’. Given that the prospect of further RBA policy moves is on the table, the AUD is set to be more sensitive to economic data releases. The RBA policy meeting on October 6 is likely to be insightful," says Foley.

Rabobank sees scope for AUD/USD to pullback towards 0.71 on a 3 month view and to fall to 0.68 in 6 months.