Forex_Australian_Dollar_Bounce_at_Risk_on_RBA_ISM_and_NFP_Outcomes_body_Picture_5.png, Australian Dollar Bounce at Risk on RBA, ISM and NFP Outcomes

Fundamental Forecast for Australian Dollar: Bullish

  • Aussie Dollar Bounce Faces Major Test as RBA Readies Monetary Policy Announcement
  • Risk Appetite Trends May Overtake Aussie Price Action as Key US Data Drives Taper Bets
  • DailyFX SSI Warns Speculative Sentiment Balance Still Favors Australian Dollar Weakness

We’ve argued in favor of a significant Australian Dollar recovery since early August. We thought an improvement in Chinese news-flow will help arrest the slide in economic growth expectations for the East Asian giant, boosting the outlook for Australia’s mining sector exports and prompting a positive shift in the RBA policy bets. The case for an upside scenario seemed all the more compelling against a backdrop of highly over-extended speculative net-short positioning and we proceeded to enter long AUD/USD after an attractive technical setup presented itself.

Prices turned higher as expected, with the COT data over the past two weeks pointing to aggressive short-covering. The week ahead will bring a major test of the Aussie’s newfound strength as all eyes turn to October’s RBA monetary policy announcement. Investors’ priced-in expectations imply a mere 6 percent probability of an interest rate cut. It is not outside the realm of possibility that traders are under-appreciating possibility of a dovish surprise however.

Indeed, the overall trend in economic news-flow has deteriorated relative to expectations since the last RBA meeting (according to data compiled by Citigroup). With that said, September’s policy statement suggested that rather than seeing no argument for additional accommodation, the central bank believes further support will yet emerge from its prior efforts. That means signs of sluggish performance need not necessarily push Glenn Stevens and company to act.

The risk of an adverse shock from macro-level forces remains significant as well. September’s FOMC meeting saw the Federal Reserve hit the reset button on investors’ outlook for the evolution of the QE3 program, unexpectedly opting not to taper the size of monthly asset purchases. The markets seemed to have become borderline complacent about the prospect of a September cutback over recent weeks but data-driven volatility now looks likely to return as the new status quo is thrashed out.

The US calendar does not disappoint, with September’s manufacturing and service-sector ISM figures as well as the all-important Nonfarm Payrolls reading headlining a busy docket of event risk. Supportive outcomes that fuel near-term “taper” speculation are likely to drive risk aversion around the financial markets and threatening to derail the Aussie’s rebound along the way. Soft results that make stimulus reduction appear more distant will probably produce the opposite result.