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AUD Remains At Risk After Breaching Key Barrier Amid Volatility Spike

Fundamental Forecast for Australian Dollar: Bearish

  • AUD/USD Finally Clears Critical Support On Broad-Based USD Gains
  • Jump In Implied Volatility May Weigh On The High-Yielding Currency
  • Breach Of The 0.8660 Barrier May Open The July ’10 Lows Near 0.8320

AUD/USD finally breached the critical 0.8660 barrier over the past week. Yet it was not the abundance of top-tier domestic economic event risk that catalyzed the ‘breakout’. Indeed, a status-quo RBA decision left steadfast policy bets intact and muted the impact of local data prints. Rather it was broad-based US Dollar gains that finally pushed the pair off the precipice.

Local business and consumer confidence data are on offer next week. Patchy readings from the leading indicators over recent months are not encouraging for broader domestic growth. Yet, we would likely need to see a severe deterioration over future months in order to elicit any response from policy makers. Until then the releases may prove non-events for the AUD, and it may look for guidance from other sources.

Elsewhere in the region; Chinese Retail Sales, Industrial Production, CPI and Aggregate Financing figures are on the docket. Yet the Aussie has witnessed a lackluster response to recent economic releases from the Asian giant. This suggests there is a high threshold for the upcoming China data to impact the commodity currency.

Outside of monetary policy expectations general market conditions remain an important consideration for the AUD. Implied volatility has recently rocketed to its highest level this year, suggesting traders are anticipating large swings amongst the majors in the near-term. Such expectations generally bode ill for the high-yield currencies as they suggest traders will be less tempted into carry trades. This in turn could leave the Aussie vulnerable to further weakness.

Speculative trader positioning in the futures market remains well off the extremes witnessed last year. This indicates there may still be room in the AUD short trade before it becomes ‘overcrowded’.

From a technical standpoint; the clearance of 0.8660 may have potentially set the wheels in motion for a descent on the July 2010 low near 0.8320 over the coming weeks. For insights into the US Dollar side of the equation read the weekly forecast here.

Written by David de Ferranti, Currency Analyst, DailyFX

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