Australian Dollar on Shaky Ground as Carry Trade Follows S&P Lower

An upcoming Australian Consumer Price Index report will likely prove the highlight for Australian Dollar trade in the week ahead, while traders may likewise do well to monitor results from US Federal Reserve and Reserve Bank of New Zealand interest rate announcements. Neither central bank is expected to move rates at their upcoming meeting, but any noteworthy shifts in rhetoric from the US FOMC could easily force moves across financial markets. Interest rate traders are also pricing in a miniscule 5 percent chance that the RBNZ will raise interest rates by 25 basis points, and any especially large surprises could force sympathetic moves for the Australian Dollar.

Reserve Bank of Australia watchers will nonetheless keep a vigilant eye on upcoming Q4 CPI figures. Consensus estimates predict that prices rose 0.4 percent through the period and 2.0 percent on a year-over-year basis. Given buoyant employment data and other signs of economic health, we would expect that inflation risks remain to the topside ahead of the release. Overnight index swaps continue to price in substantial RBA rate hikes through the next 12 months, but considerable uncertainty surrounding the timing of the next interest rate hike will make upcoming CPI data especially significant. Watch for considerable Australian Dollar strength on an upside surprise, while a noteworthy disappointment could force even sharper AUD weakness.

It will likewise be of critical importance to watch financial market risk sentiment and its effects on the Forex carry trade. As one of the highest-yielding major world currencies, the Australian Dollar has appreciated on considerable investor demand for high-yielding investments. Yet we have seen time and time again that high-yielders are the first to fall during times of turmoil, and it will be especially important to watch for signs of recovery in the S&P 500 and other key risk barometers. - DR