Australian Dollar May Gain Further on RBA Expectations, S&P Strength
Fundamental Outlook for US Dollar: Bullish
- Australia sees impressive Gross Domestic Product growth in the second quarter
- Trade Balance data likewise bolsters case for Australian Dollar strength
Impressive economic data and sharp rallies in global risky asset classes made the Australian Dollar the top-performing G10 currency on the week, breaking to fresh multi-week highs against the US Dollar. Australian Retail Sales and Gross Domestic Product showed growth considerably above consensus forecasts and instantly cooled speculation that the Reserve Bank of Australia would lower interest rates through the foreseeable future. This in turn raised yield expectations for the rate-sensitive AUD and leaves it on strong footing headed into the coming week of trade.
Interest rates will remain the focus in the days ahead on often market-moving Reserve Bank of Australia interest rate announcement. Overnight Index Swaps previously priced in a very marginal (10%) chance that the RBA would cut rate targets by 0.25 percentage points through their coming announcement. Yet strong data quickly negated any such possibility, and in fact traders predict that the RBA will leave interest rates almost exactly unchanged in the coming 12 months. Given that the Australian Dollar boasts the highest interest rate of any G10 currencies, many traders have bought the AUD against lower-yielders such as the US Dollar and Japanese Yen. Solid interest rate prospects should, all else remaining equal, support AUDUSD and AUDJPY strength.
Traders will otherwise watch for any surprises out of a late-week Australian Employment Change report. Expectations of robust job gains arguably leave risks to the downside ahead of the data, but recent strength in other economic indicators leaves little reason to expect anything other than reasonably strong jobs growth.
The Australian Dollar strengthened considerably on similar rallies in the US S&P 500, and we would expect the risks-sensitive currency to continue to track the S&P and other important risk barometers. Said index’s break to monthly highs bodes well for broader risk sentiment, and indeed current momentum points to further AUD gains. - DR
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