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Australian Dollar to Track Risk Trends with US Data, Greece in Focus

Fundamental Forecast for the Australian Dollar: Neutral

  • Upbeat US News-Flow May Rebuild Fed Outlook, Trigger Risk Aversion
  • Australian Dollar to Track Sentiment’s Response to Greece Developments
  • Find Pivotal Inflection Points for the Australian Dollar with DailyFX SSI

A quiet economic calendar on the domestic front in the week ahead is likely to see the Australian Dollar looking to external catalysts for direction cues. Continued speculation about the direction of Fed monetary policy following last week’s FOMC meeting and on-going Greek funding negotiations are likely to be in the spotlight.

In both cases, the Aussie is likely to fall in with whatever news-flow implies for market-wide risk appetite. Indeed, the correlation between the currency’s average value against its top counterparts and the MSCI World Stock Index – a proxy for sentiment trends – now stands at a six-month high of 0.84 (on rolling 20-day studies).

On the Fed policy front, a string of data releases will help shape investors’ perceptions of economic activity trends and gauge whether the Feb might judge growth to be durable enough to absorb higher borrowing costs. Measures of home sales, durable goods orders and consumer confidence take top billing but a wealth of second-tier indicators is also due to cross the wires.

Traders’ top takeaway from last week’s FOMC announcement seemed to be that the expected tightening trajectory over the coming years has flattened compared with the Fed’s March assessment. On net, this was interpreted as a dovish outcome. However, policymakers likewise called for two rate hikes in 2015, which seemed to pass somewhat below the radar.

With only four meetings left this year and Fed Funds futures reflecting bets on a single increase in December, there seems ample room for a hawkish surprise in the event that news-flow surprises on the upside. Realized US data outcomes have notably improved relative to consensus forecasts since mid-May, opening the door for just such an outcome to weigh on risk appetite and sting the Aussie.

Turning to Greece, the markets appear fairly sanguine for now despite continued deadlock between Athens and its creditors. A bit under two weeks remains until the expiry of the current bailout program and the scheduled repayment of €1.6 billion to the IMF. That seems to represent a red line for investors. In the interim, traders seem determined to hold out for an 11th hour compromise.

With that in mind, price action ought to be relatively unresponsive to ongoing bickering in the near term as long a narrow time buffer keeps hope alive. A clear-cut breakthrough paving the way for an accord or an official breakdown without room to maneuver further is likely to trigger volatility however. Needless to say, side-stepping “Grexit” would support risk appetite and boost the Aussie. The alternative points to losses.