Taper talk hit commodity currencies hard this week, pushing the Australian dollar to its lowest level in three months at around 89.13 cents. Now analysts say a raft of negative headwinds spell further bad news for the currency.
The Aussie dipped below 90 cents per U.S. dollar on Friday after better-than-expected U.S. retail sales data increased expectations that the Federal Reserve will taper its asset purchases at next week's policy meeting, pushing the currency closer to a three-year low.
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Analysts told CNBC the Aussie was set for further pain against a backdrop of tapering and other negative headwinds closer to home.
"Hands down, the worst performing currency this week is the Australian dollar. Since Monday, the currency pair has lost over 2 percent of its value against every major currency," said Kathy Lien, managing director of BK Asset Management.
Talk of a December taper has been gaining pace this week, as an increasing number of analysts now think improvements in the U.S. economy might give the Fed enough confidence to taper next week. A reduction in the asset purchase program is expected to strengthen the U.S. dollar and therefore weaken currencies traded against it, like the Aussie.
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According to Lien, taper-talk was a key driver of Aussie weakness, but a raft of disappointing data out of Australia's domestic market this week also added to downward pressure.
China imports for November released over the weekend missed expectations, which is bad news for Australia as China is its largest trading partner, while a rise in Australia's unemployment rate to 5.8 percent, and news that consumer confidence had fallen sharply in December intensified Aussie dollar selling this week.
But one of the most prominent drivers of Aussie weakness was the central bank's continued jawboning of the currency, said Lien.
In an interview with two major Australian media outlets this week, Reserve Bank of Australia (RBA) Governor Glenn Stevens said he hoped Fed tapering would help weaken Australia's domestic currency to his targeted level of 85 cents per dollar, in a bid to spur growth. Meanwhile analysts still see the bank moving to cut interest rates if it is unable to talk the Aussie down.
"Either way, the RBA is clearly dovish and want to see the currency lower. As such, we not only expect the Australian dollar-U.S. dollar to break below its three-year low of 0.8846 but we expect it slide to extend to down to 85 cents," added Lien.
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