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Australian Dollar Bounce May Be Stymied by Outside Forces Yet Again

Fundamental Forecast for the Australian Dollar: Neutral

  • US News-Flow May Boost September Rate Hike Bets, Hurting Aussie
  • RBA Meeting Minutes to Underscore Shift to Neutral Policy Stance
  • Find Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar ended last week little-changed as the supportive influence of an improving monetary policy outlook was countervailed by China-linked jitters. While a palpable shift away from an overtly dovish bias and toward a neutral one at the RBA promised to help engineer an Aussie recovery, the PBOC’s unexpected decision to devalue the Yuan confused investors and set off seesaw volatility.

More of the same looks likely in the week ahead, with US event risk taking the place of Chinese news-flow as the disrupting force undermining supportive developments on the home front. Indeed, the Yuan devaluation fiasco seems to have faded from view as the markets acclimate to the PBOC’s new regime for setting the daily reference rate. The release of July’s US CPI figures as well as minutes from last month’s FOMC meeting promise to keep investors on edge.

The former release is set to show the core year-on-year inflation rate rose to 1.9 percent, the highest in a year. Broadly speaking, US economic news-flow has increasingly outperformed relative to consensus forecasts since mid-May, leaving the door open for an even stronger reading.

Meanwhile, the account of the Fed’s July sit-down may foreshadow a rate hike in September. The conspicuous absence of dissent from hawkish FOMC members last month hints that withholding tightening may have been a tactical rather than a qualitative decision.

Analysts tracked by Bloomberg seem to favor “liftoff” in September while Fed Funds futures continue to price it in for October, meaning a move in July would have almost certainly triggered pandemonium. With that in mind, Fed officials may have acknowledged that the economy is ready for stimulus withdrawal but opted to wait for the sake of smoother normalization.

Clues to that effect may help cement September as the consensus time frame and force investors to re-price expectations baked into asset prices. That stands to weigh on risk appetite as traders consider the pivotal role of expansionary monetary policy in fueling the post-crisis recovery in financial markets, sending the Aussie lower alongside other sentiment-linked instruments. Needless to say, a stronger CPI print would only encourage this process.

Domestically, the spotlight will be on minutes from Augusts’ RBA meeting. The document will probably reinforce the sense that central bank is firmly in wait-and-see mode. In fact, as much was firmly telegraphed by Assistant Governor Kent late last week. However, the degree to which the Aussie will be able to capitalize on the central bank’s shift away from a dovish posture this time around is unclear.