Australian Dollar May Fall Further on Evolving Fed, RBA Policy Bets

Fundamental Forecast for the Australian Dollar: Bearish

• Aussie jobs data may stoke RBA rate cut bets
• Fed tightening fears may sink Aussie amid risk aversion
• Find Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar suffered steep losses last week, tumbling to the weakest level in six years against its US counterpart. The move reflected a toxic mix of global and domestic factors driving policy divergence bets as well as broad-based risk appetite.

On the rates outlook front, a disappointing second-quarter GDP report fueled RBA rate cut speculation while Augusts’ US employment data revealed the lowest jobless rate since April 2008, stoking speculation that the Fed may yet begin to tighten later this month. Meanwhile, sweeping risk aversion weighted on the spectrum of sentiment-geared assets. Indeed, the benchmark S&P 500 stock index produced the weakest weekly close in eight months.

Both narratives will be on display in the week ahead. Domestically, Augusts’ employment figures will be in the spotlight. Expectations point to a mere 5,000 net increase in hiring, marking the weakest print in four months. Recent Australian news-flow has underperformed relative to consensus forecasts, opening the door for an even weaker outcome. That may cement the likelihood of a rate cut at October’s policy meeting, compounding downward pressure on the exchange rate.

A trio of speeches from RBA Deputy Governor Philip Lowe and Assistant Governor Guy Debelle as well as the central bank’s financial stability department chief Lucy Ellis may likewise help fine-tune policy bets. As it stands, traders are pricing in a 55 percent probability of a 25 basis point cut in the cash rate at the next policy sit-down.

Externally, the markets will probably remain preoccupied with the timing of the first post –QE Fed interest rate hike as the September FOMC meeting draws closer. US PPI and University of Michigan Consumer Confidence figures headline a relatively quiet data docket and seem unlikely to materially alter established momentum.

This seems to bode ill for the Aussie considering the lead from this week’s price action favors the unwinding of dovish policy bets as traders consider the legitimate possibility of a hike mid-month. A scheduled speech from Minneapolis Fed President Kocherlakota will not surprise many with its almost certainly dovish tone and so ought to pass with little fanfare.

Besides fueling RBA versus Fed policy divergence bets, building concerns about an FOMC rate hike just around the corner will probably amount to a strong headwind for risk appetite as markets ponder the implications of tightening against a backdrop of slowing global growth and rising asset-price instability. Needless to say, this only compounds of threat of deeper losses for the Australian unit.