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AUD To Remain Heavy As Elevated Volatility Limits Scope For A Recovery

Fundamental Forecast for Australian Dollar: Neutral

  • AUD/USD Consolidates As Local Data Offers Few Fresh Cues
  • Risk-Aversion Likely To Limit The Scope For A Recovery
  • Daily Close Below 0.8660 To Open Next Leg Lower To 0.8320

The Australian Dollar consolidated against most of its major counterparts for the week with plenty of intraday swings against its US namesake. A status-quo RBA rate decision and dubious set of local employment figures offered the currency few fresh cues. Additionally, elevated volatility levels kept the bulls at bay and hindered a recovery for the high-yielding currency.

Next week brings domestic Consumer and Business confidence data as well as Chinese Trade Balance figures. However, the regional economic releases may do little to shift well-anchored RBA policy bets. This in turn may generate another lackluster response from the AUD to the figures.

Local economic prints continue to play second fiddle to other guiding factors including the ‘risk-off’ theme that has gained traction in recent weeks. Investor nervousness and heightened volatility may continue to detract from what has actually been a relatively stable yield advantage for the Aussie. This could limit the scope for a recovery and keep AUD/USD capped below the 90 US cent handle over the near term.

Further, positioning amongst speculative futures traders remains well-above last year’s extremes despite recently flipping to net short. This suggests there is plenty of room in the AUD short trade before it begins to look crowded.

Downside risks remain centered on the 0.8660 floor, which if broken on a ‘daily close’ basis could open the next leg lower to the July ‘10 low at 0.8320. For more on the US Dollar side of the equation read the weekly forecast here.