Overnight Index Swaps quickly corrected and the Australian Dollar shed previous gains, but impressive strength in global risk sentiment left the Aussie Dollar higher through Friday’s close. Australian Dollar traders now turn their attention to the upcoming week of key inflation data and its implications for RBA rate hikes, while performance in the S&P 500 and other risky asset classes will quite likely continue to drive moves in the high-yielding AUD.
The Australian Dollar’s inability to successfully challenge and break its recent highs suggests that buying pressure may be abating, and it will be critical to watch near-term moves in the previously high-flying currency pair. Volatility is likely to pick up around upcoming Consumer Price Index data, and traders will react to any major surprises on the inflation report.
The aforementioned minutes from the most recent RBA meeting suggest that officials are somewhat comfortable with the general trajectory of inflation and believe little action is necessary. Yet any especially large surprises could arguably force the RBA’s hand. Consensus forecasts call for a 2.8 percent annual CPI inflation rate through the first quarter of the year. Said number is dangerously close to the top of the RBA’s target band at 3 percent, and upward surprises could boost forecasts for AUD yields.
Traders should otherwise watch moves in the S&P and other key risk barometers. Given fiscal crises in the Euro Zone and similar sources of market turmoil, it seems that a great number of factors could force a sharp re-pricing of risk at any moment. This author continues to bet on S&P 500 weakness, but as long as markets remain complacent the S&P and Australian Dollar will likely continue to set fresh highs. - DR
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