Australian Dollar Looks to RBA, US Jobs Data for Direction
Fundamental Forecast for Australian Dollar: Neutral
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The Australian Dollar found itself under pressure once again last week as shifting monetary policy expectations continued to undermine demand for the high-yielder. The sharp swoon in the AUDUSD exchange rate since the beginning of May has been accompanied by a brisk narrowing of the yield spread between benchmark US and Australian 10-year bond yields. This implies an Aussie-negative realignment of investors’ perceptions of relative returns to be had from holding one currency over the other. That spread hit the lowest level since early February 2009 last week, sending AUDUSD downward to yield the weakest close since October 2011.
The week ahead is likely to see further volatility against a backdrop of high-profile event risk on the Australian and the US side of the equation. The Reserve Bank of Australia (RBA) is due to deliver its monetary policy announcement. Data from Credit Suisse suggests investors are pricing in a modest 17 percent probability of another 25bps interest rate cut this time around. Economists seem to agree, with only one out of 25 analysts polled by Bloomberg ahead of the meeting expecting Glenn Stevens and company to bring the benchmark lending rate to a new record low of 2.5 percent. This suggests the focus will be on the tone of the policy statement accompanying the rate decision. Minutes from May’s RBA outing hinted policymakers may be in wait-and-see mode at this point and rhetoric to that effect in June’s statement may prove supportive for the Aussie.
Any corrective gains in the wake of the RBA rate decision may prove short-lived however as the markets’ focus turns to the US data docket, where the spotlight is on Friday’s US Employment figures. Consensus forecasts suggest the world’s top economy added 165,000 jobs in May. A print in line with expectations would fall below 3- and 6-month trend averages – both of which now hover above the closely watched 200k/month threshold – as well as the 12-month average at 173k. That may pour cold water on calls for a near-term reduction in the size of the Federal Reserve’s monthly QE3 asset purchases. That has scope to weigh on US yields and push out the spread between them and their Australian counterparts, thereby pushing the US Dollar lower against the Aussie. The Nonfarm Payrolls (NFP) figure has tended to outperform expectations over the past 12 months however and revisions since the start of 2013 have overwhelmingly favored the upside, leaving the door firmly open to USD-supportive outcome.
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