Currencies

No respite in sight for the battered Aussie

Phillip Hayson | Photolibrary | Getty Images

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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Door is open for Fed to taper: Pro
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Door is open for Fed to taper: Pro

Meanwhile, Chris Tedder, research analyst Forex.com, also told CNBC Asia's Squawk Box on Friday that he expected the Aussie to see further pain.

"All that taper talk - I think the biggest impact it's had is on some of the commodity currencies, especially the Aussie dollar," said Tedder, who forecasts the Aussie to be trading at around 85 cents by the end of the year.

"That's the biggest risk at the moment. The market has said if we do see a tapering next week then we will see a big selloff," he added, referring to commodity-based currencies.

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However, the one commodity currency that seems immune to the tapering pain is the New Zealand dollar, driving the Aussie-Kiwi to a fresh five year low this week.

"In contrast [to the Aussie], the New Zealand dollar is performing very well thanks to the hawkishness of the Reserve Bank of New Zealand," said Lien, referring to speculation that the central bank is set to become one of the first central banks worldwide to hike interest rates in the near future.

The Aussie has lost 14 percent against the dollar this year and was trading at around 0.8922 cents by mid-afternoon Friday in Asia.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie