Aussie Dollar to Look Past RBA Meeting, Focus on US News-Flow
Fundamental Forecast for Australian Dollar: Neutral
- Australian Dollar Fell for Sixth Consecutive Week, Fed QE “Taper” Bets the Culprit
- US Economic News-Flow Likely to Trump the RBA Rate Decision in the Week Ahead
- DailyFX SSI Speculative Sentiment Gauge Argues for Further Aussie Dollar Selling
The Australian Dollar remained under pressure last week, dropping to the lowest level in three months against its US namesake. The liquidation since mid-October has tracked a rebound in US Treasury yields, hinting the move reflects rebuilding speculation about a forthcoming “tapering” of Fed QE asset purchases.
Traders thought last month’s US government shutdown would hobble the recovery and force the Fed to hold off on scaling back stimulus until March 2014. US economic news-flow has held up impressively relative to expectations however (according to data from Citigroup), feeding fears of a sooner move to reduce stimulus.
That appears to have encouraged an unwinding of some positions dependent on cheap QE-assisted funding. Market-wide risk aversion has hardly materialized however, with the MSCI World Stock Index finishing last week just below its record high set in late 2007. Meanwhile, the Japanese Yen continues to face aggressive selling, arguing against a broad-based exodus from carry trade positions.
Portfolio readjustment may explain this disparity. The Aussie’s slide has moved in lock-step with a sharp increase in USD-denominated funding cost relative to the JPY-funded alternative. That may suggest that the specter of a comparatively sooner move to cut back QE is encouraging investors to swap out USD-funded carry trades for JPY-funded ones rather than derailing risk appetite at large.
The week ahead offers plenty of top-tier US economic data releases to inform the evolution of this process. November’s ISM round-up, a revised set of third-quarter GDP figures and the all-important Employment report are all on tap. Outcomes that top economists’ forecasts are likely to encourage the rotation out of USD-funded carry and weigh threaten to push the Aussie lower, while those that fall short may offer the unit a lifeline after six consecutive weeks of selling.
On the domestic front, the year’s last RBA interest rate decision is unlikely to yield substantial policy innovations. Glenn Stevens and company will probably use the statement accompanying the announcement to continue talking down the Aussie exchange rate, but the emergence of any concrete action doesn’t seem to be in the cards. Indeed, the markets are pricing in a mere 6 percent probability of a rate reduction according to data from Credit Suisse. - IS
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