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Australian Dollar to Rise Further as Markets Ponder Fed Outlook

Australian Dollar to Rise Further as Markets Ponder Fed Outlook

Ilya Spivak, Head Strategist, APAC
Australian_Dollar_to_Rise_Further_as_Markets_Ponder_Fed_Outlook_body_Picture_1.png, Australian Dollar to Rise Further as Markets Ponder Fed Outlook

Fundamental Forecast for Australian Dollar: Bullish

  • December’s Australian Jobs Report Unlikely to Derail Stable RBA Outlook
  • Aussie Bounce to Continue as Markets Ponder Fed Policy After Dismal NFP
  • Help Time Key Turning Points for the Australian Dollar with DailyFX SSI

We’ve argued that the Australian Dollar has room to correct higher in early 2014 as the fundamental argument for Aussie weakness becomes increasingly flimsy while speculative traders remain heavily net-short (per futures market positioning data from the CFTC). Absent new evidence to advance the case against the currency, we said a period of profit-taking that drives the Australian unit higher is probably ahead.

Our suspicions appear to be playing out: the Aussie has now completed its first set of back-to-back weekly gains in three months. Looking ahead, the domestic backdrop is little-changed: The priced-in RBA policy outlook remains stable, with data from Credit Suisse showing investors are betting on standstill over the coming 12 months. Next week’s key news-flow seems unlikely to materially change the situation, with December’s Employment data expected to yield a broadly on-trend 10k in hiring.

On the external front, the landscape appears to have improved somewhat. The Aussie has been closely anchored to US treasury yields, falling in lock-step with a rise in borrowing costs as the Fed began to “taper” its QE effort and drove liquidation in yield-sensitive assets. Last week’s dismal US jobs report may force a correction as traders ponder the possibility of a slowdown in stimulus reduction, allowing Treasuries to correct higher and weighing on US borrowing costs. That stands to undo some of the recent deterioration in the Australia-US yield spread, pushing the AUD higher.

Next week’s critical event risks come from the “Fed-speak” calendar. Comments from incoming FOMC voting members Richard Fisher and Charles Plosser – Presidents of the Dallas and Philadelphia branches of the central bank – are likely to be in focus. The Atlanta Fed’s Dennis Lockhart, San Francisco’s John Williams, Richmond’s Jeff Lacker and Chicago’s Charles Evans – all alternate FOMC members for 2014 – are also on tap. To compound the situation further, outgoing chairman Ben Bernanke is also due to speak. Finally, the central bank is set to release its Beige Book survey of regional economic conditions.

All this activity from the Federal Reserve ought to offer plenty of opportunity for speculation about the extent to which policymakers are inclined to pause the “tapering” process or press on with scaling back asset purchases. Realistically speaking, one data point is unlikely to derail the central bank’s medium-term view. A rhetorical shift that underscores the data dependence of QE withdrawal and reiterates the possibility that the process may be slowed or halted if news-flow turns meaningfully sour can force a retracement of recent trends however, adding fuel to the Aussie’s recovery. - IS

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