The Australian Dollar faces a tough week as a heavy load of negative economic data and renewed flight from risky assets combine with bearish undertones to put downward pressure on the exchange rate. Looking at the calendar, the headline release is undoubtedly the interest rate decision from the Reserve Bank of Australia (RBA). On Friday, Sterling traded at its highest level against the Australian Dollar (AUD) since mid-December 2008.

Last week the AUD lost ground as investors moved to factor in a greater likelihood that the RBA may cut interest rates aggressively this week. The RBA's interest rate announcement is scheduled for Tuesday, with economists’ forecasts calling for a 100 basis point cut to bring rates to 3.25%. The Australian Dollar typically weakened as there were indications that domestic interest rates may fall further and more quickly than previously expected. This speculation was fuelled by a larger than expected cut from its New Zealand counterpart and weak data releases; inflationary pressures continued to retreat faster than the RBA had forecast, whilst bank lending fell for the first time since 1992.

Traders are now expecting the RBA to slash borrowing costs by 200 basis points over the next 12 months, with former RBA chief Bernie Fraser calling for benchmark rates to head below 2%, saying that the current recession will be “deeper and longer” than the last downturn in 1991.

The International Monetary Fund said last week that global economic growth will come to a “virtual standstill” in 2009 to yield just 0.5%. This is the lowest yet in the post-war period and threatens to substantially prolong the economic plight of export-intensive countries.