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Forex Analysis: Australian Dollar May Fall After "Fiscal Cliff" Deal

Forex Analysis: Australian Dollar May Fall After "Fiscal Cliff" Deal

Ilya Spivak, Head Strategist, APAC

Fundamental Forecast for Australian Dollar: Bearish

A bare-bones domestic economic calendar once again leaves the Australian Dollar at the mercy of broader risk appetite trends. The spotlight turns squarely to Washington, DC in the week ahead as policymakers struggle to reach an agreement on avoiding the so-called “fiscal cliff”, a set of tax hikes and government spending cuts due to trigger at the turn of the calendar year that the Congressional Budget Office (CBO) projects will tip the US back into recession if left as-is.

If the cliff is to be avoided, a deal must be agreed-upon and put in motion this week. The markets’ baseline scenario calls for just such an outcome. The consensus view is that policymakers will cobble together a plan that avoids an immediate austerity shock but falls short of setting US public finances on a sustainable long-term path, with a framework for hashing out a “grand bargain” in the future probably baked in.

While a watered-down accord is undeniably better for risk appetite than none at all, its ability to deliver meaningful gains for sentiment-linked assets including the Aussie Dollar is limited. If policymakers deliver in line with expectations already priced into exchange rates, the announcement of a deal is unlikely to provide meaningful upward follow-through beyond a short-term advance reflecting the dissipation of uncertainty. Indeed, with investors’ forecasts validated, the impetus for speculation evaporates.

On balance, this suggests the Australian Dollar may be vulnerable in the aftermath of a fiscal cliff agreement. If the US austerity time bomb is defused in time as expected, the docket of top tier event risk will be cleared effectively cleared through the end of 2012. That clears the way for traders to begin looking ahead toward trend development in the year ahead, where a key feature of the interest rate outlook sees the RBA as the central bank as the central bank with the greatest scope for monetary easing in the G10.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.