Fundamental Forecast for Australian Dollar: Bullish
- An Aussie bounce has failed to gain traction despite improving policy, China expectations
- RBA rate decision may finally spark AUD/USD rally if rhetoric shifts to “neutral” bias
- Fed QE “taper” speculation may undermine Aussie recovery on ISM, NFP data releases
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We’ve argued in favor of a significant Australian Dollar recovery over recent weeks. We suggested that a dramatic improvement in Chinese news-flow will help stabilize economic growth expectations for the East Asian giant. Considering the noteworthy relationship between the Chinese GDP bets and AUD/USD – a link held together by the impact of Chinese demand for Australian exports on the latter country’s economic performance and thereby on RBA monetary policy – this was expected to lay the groundwork for a recovery. The case for an upside scenario seemed all the more compelling given a backdrop of highly over-extended speculative net-short positioning and we proceeded to enterlong after an attractive technical setup presented itself.
Some pieces of the puzzle have started to come together. Chinese economic growth expectations have stabilized as expected, with a Bloomberg poll of market observers showing the median forecast for 2013 GDP growth held steady in August after four consecutive months of deterioration. Priced-in RBA monetary policy bets saw a dramatic improvement over the same period, with traders no longer looking for any further easing over the coming 12 months. While speculative net-short positioning remains near its record high, the weekly change in exposure has dwindled to a trickle, suggesting the move lower is running out of fuel needed to sustain itself.
The Aussie has roundly ignored the shifting landscape however, with a meaningful bounce failing to materialize. On balance, this suggests that markets have yet to see a significant-enough catalyst to drive a reversal. That may be about to change with next week’s RBA interest rate decision. Traders are overwhelmingly pricing in a “no change” outcome, putting the spotlight on the policy statement and its implications for speculation over the coming months. Concrete rhetoric cementing last month’s apparent shift to a “neutral” policy bias may well prove to be the spark needed to begin a reversal.
The threat of interference from external factors remains acute however, with speculation surrounding the likelihood of a Fed move to “taper” QE asset purchases likely to heat up as a slew of high-profile data releases cross the wires. Augusts’ ISM figures and the all-important Nonfarm Payrolls print are in focus. Outcomes that top expectations are likely to boost calls for a speedy move to unwind Fed stimulus efforts in the months following September’s widely-expected $10 billion cutback, which threatens to punish the Aussie amid a broad-based deterioration in risk appetite.
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