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Forex: Australian Dollar May Recover Before Larger Selloff Continues

By , Currency Strategist
10 May 2013 20:10 GMT
Forex_Australian_Dollar_May_Recover_Before_Larger_Selloff_Continues__body_Picture_1.png, Forex: Australian Dollar May Recover Before Larger Selloff Continues

Fundamental Forecast for Australian Dollar: Neutral

Last week brought what appears to be a critical trend change in the Australian Dollar’s path against its US namesake. AUDUSD put in a critical break below the bottom of a range that had contained prices since September of last year, seemingly opening the door for meaningful decline in the days and weeks ahead. Prices will have a hard time sustaining aggressive near-term bearish momentum without a fundamental catalyst however, the absence of which may produce a corrective bounce for the battered currency before the larger decline resumes.

As we suspected last week, the Aussie’s downward breakout came on the heels of an interest rate cut from the Reserve Bank of Australia (RBA). Indeed, the AUDUSD exchange rate has closely tracked various measures of front-end yields including the 12-month Libor as well as the 2-year government bond rate leading into the RBA announcement and thereafter.

For this to remain a driving reason for Aussie Dollar weakness, the outlook for rates will have to continue to deteriorate. That may prove to be a tall order in the immediate term in the wake of April’s impressive employment figures and an absence of top-tier scheduled event risk in the coming days that might have represented an inflection point. In fact, priced-in expectations put the probability of another 25bps rate cut at June’s RBA meeting at just 22 percent at present (according to data from Credit Suisse).

The return of risk sentiment trends as an important contributor in Australian Dollar trend development represents another important consideration. RBA rate cut notwithstanding, the Aussie remains the highest-yielding currency in the G10 FX space. The economic calendar offers ample evidence on the global economic growth front, with US activity surveys and Retail Sales figures as well as the preliminary set of Eurozone first-quarter GDP figures on tap. The Aussie may well find its way higher if traders’ recovery hopes are encouraged in the wake of these outcomes.

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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10 May 2013 20:10 GMT