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Australian Dollar May Rebound Absent Swell in Fed QE Taper Bets

Australian Dollar May Rebound Absent Swell in Fed QE Taper Bets

Ilya Spivak, Head Strategist, APAC
Australian_Dollar_May_Rebound_Absent_Swell_in_Fed_QE_Taper_Bets_body_Picture_1.png, Australian Dollar May Rebound Absent Swell in Fed QE Taper Bets

Australian Dollar May Rebound Absent Swell in Fed QE Taper Bets

Fundamental Forecast for Australian Dollar: Neutral

Capitalize on Shifts in Market Mood with the DailyFX Speculative Sentiment Index.

Monetary policy expectations remain the driving force behind Australian Dollar price action, with the currency tracking closely with the spread between domestic and US bond yields. This opens the door for volatility as a steady stream of scheduled event risk lines up to cross the wires on both the Australian and US sides of the equation.

The RBA outlook will be informed by minutes from the central bank’s July meeting and second-quarter Chinese GDP figures. The policy statement that emerged from this month’s RBA sit-down continued to argue that the outlook for inflation afforded scope for further easing and investors will be keen to size up the economic triggers likely to spur such action. Meanwhile, China is penciled in to report that the economy expanded at a year-on-year pace of 7.5 percent in the second quarter, the weakest since the three months through September 2012.

As it stands, the markets are pricing in a 71 percent probability of another 25bps rate cut when the RBA meets in early August. That seems to leave relatively little room for significant deterioration in policy expectations absent a particularly dovish surprise lurking in text of the minutes release or a catastrophically weak Chinese GDP print. The former seems unlikely: minutes from RBA meetings tend to cling very closely to the policy statement. The latter is tough to handicap but if Chinese news-flow is indeed “managed” as many suspect, a volatility-driving outlier of an outcome seems counter-intuitive after recent stress in the country’s money markets.

On balance, that tips volatility risk to the upside, hinting the Aussie may prove more responsive to positive surprises versus negative ones. Furthermore, the latest update to the CFTC Commitment of Traders (COT) report shows that speculative net short Australian Dollar positioning is stabilizing after hitting a record high. This may be reflecting a market that has become disproportionately sensitive to counter-trend news as the magnitude and speed of recent selling discourages new capital from chasing the decline while existing shorts are increasingly compelled to book profits. Taken together, this may allow for the Australian unit to correct higher.

Developments on the Australian side of the policy expectations spread will have to contend with heavy speculation surrounding the US outlook. Markets seem to be coming around to the idea that last week’s much-discussed Ben Bernanke commentary marked clarification of the Fed’s policy trajectory rather than an about-face on the intention to taper asset purchases. This is likely to make for highly data-sensitive price action yet again. US Retail Sales, CPI, Industrial Production, Housing Starts and Building Permits data points are all on tap, with improvements expected all around. These and a chipper Fed Beige Book regional economic conditions survey may swell QE cutback worries, sending US yields higher and weighing and on the Aussie. -IS

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