Australian Dollar Has Room to Recover if CPI Data Cooperates
Fundamental Forecast for Australian Dollar: Bullish
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Last week, we argued that the Australian Dollar appeared increasingly likely to launch a recovery. We noted that traders were already pricing in a strong possibility of an RBA interest rate cut in August – leaving relatively room for deterioration in the policy outlook – while speculative net short positioning was stabilizing having hit a record high (according to the CFTC’s COT report). This made for an environment where the Aussie appeared to be disproportionately sensitive to counter-trend news as the intensity of recent selling discouraged new capital from chasing the decline while existing shorts became increasingly compelled to book profits.
As it stands, the situation is relatively unchanged. The latest set of COT figures points to new record high in speculative net short Aussie bets but the pace of increase has withered dramatically, reinforcing the idea that the selloff is running dry on capital inflows needed to perpetuate it. The priced-in probability of an RBA interest rate cut at next month’s policy meeting has moderated a bit but remains formidable at 63 percent. The overall backdrop for a correction has arguably improved. Last week, a hefty dose of US news-flow including several high-profile economic reports and testimony from Fed Chairman Ben Bernanke, kept the Aussie caught up in QE “taper” speculation. This time around, a relatively tamer US calendar led by Home Sales and Durable Goods Orders data is on tap, allowing more room for the Australian unit to carve its own path forward.
The publication of Australia’s second-quarter CPI figures stands out as the single-most significant bit of scheduled event risk. Economists’ consensus forecast suggests the headline year-on-year inflation rate will remain unchanged at 2.5 percent. Needless to say, a print in line with expectations is unlikely to do much one way or another for the RBA policy outlook, implying a muted response from the Aussie. An estimate of price growth from TD Securities and the Melbourne Institute projects a slowdown however, putting inflation at around 2.2-2.3 percent on average in the three months through June. This opens the door for a downside surprise when the official data set comes across the wires, an outcome that may cap any Aussie gains. -IS
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