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AUD Stamina To Be Tested On Employment Data And Surge In Volatility

AUD Stamina To Be Tested On Employment Data And Surge In Volatility

2014-09-05 23:03:00
David de Ferranti, Currency Analyst
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AUD Stamina To Be Tested On Employment Data And Surge In Volatility

Hourly Chart - Created Using FXCM Marketscope 2.0

Fundamental Forecast for Australian Dollar: Neutral

  • AUD/USD May Remain Within Its 92 to 95 US Cent Trading Band
  • Eyes Turn To Upcoming Employment Figures Following July Shock
  • Surge In Implied Volatility Threatens To Sap Carry Trade Demand

The Australian Dollar outperformed against most of its major counterparts over the week, yet is heading for a flat finish against its US namesake ahead of the August Non-Farm Payrolls figures.

A parade of top-tier economic releases including Q2 GDP, trade balance figures and retail sales data passed without any major disappointments. Moreover, the RBA served a status-quo statement and Governor Stevens delivered another round of rehashed rhetoric. While on balance policy bets have been left relatively unchanged, the passing of the event risk itself has likely left traders more comfortable in holding the Aussie.

Over the coming week domestic employment data headlines the economic docket while business and consumer confidence figures take a back seat. The surprise jump in the July unemployment rate to a 12 year high caught traders off-guard and generated a significant intraday spike from the Aussie. Another significant deviation from expectations to the upcoming release could yield a similar knee-jerk reaction from the currency.

However, the RBA has noted that more forward-looking labour market indicators offer encouraging signals. This suggests that it would take a material deterioration in the broader employment picture to generate a change in tone from the central bank. Without a shift in policy bets any reaction by the AUD to the upcoming report may prove short-lived.

Chinese trade balance figures are also set to cross the wires over the coming week. While the bulk of Australian commodity exports are destined for the Asian giant, the correlation between their prices and the Aussie has diminished considerably over the past year. This suggests the potential impact of the data on the AUD may be limited.

Finally, geopolitical turmoil appears to be a distant blip on the radar for traders which is unlikely to threaten the Aussie’s resilience. The greater risk stems from the surge in implied volatility to a multi-month high. This indicates traders are pricing in a greater chance of some significant market swings occurring in the near-term, which in turn diminishes the Aussie’s carry appeal. This may not prove sufficient to topple the high-yielding currency, yet could cap the extent of any gains.

On balance the path of least resistance for the AUD is for the pair to remain within its 92 to 95 US cent trading band. Refer to the US Dollar outlook for insights into how the USD side of the equation may influence the pair.

Written by David de Ferranti, Currency Analyst, DailyFX

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