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Australian Dollar Volatility to Return on RBA, Fed Policy Speculation

Australian Dollar Volatility to Return on RBA, Fed Policy Speculation

2015-10-23 22:04:00
Ilya Spivak, Sr. Currency Strategist
Australian Dollar Volatility to Return on RBA, Fed Policy SpeculationAustralian Dollar Volatility to Return on RBA, Fed Policy Speculation

Fundamental Forecast for the Australian Dollar: Neutral

  • Upbeat 3Q Inflation Data May Undermine RBA Rate Cut Speculation
  • Aussie Dollar to Fall in With Risk Trends After FOMC Rate Decision
  • Find Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar edged lower for a second week after finding resistance below the 0.74 figure against its US counterpart. Momentum has proven to be lackluster however, yielding the tamest price action in a month. Volatility looks likely to return in the week ahead however amid a steady stream of high-profile event risk of the home-grown and external varieties.

On the domestic front, speculation surrounding the likelihood of an RBA interest rate cut at next month’s policy meeting remains in focus. The priced-in likelihood of a 25 basis point reduction now stands at 48 percent, down from over 60 percent in the prior week, on the back of marginally upbeat Chinese CPI data and an unexpectedly chipper tone on display in minutes from the central bank’s October meeting.

Third-quarter CPI figures will next inform the debate. The benchmark year-on-year inflation rate is expected to tick higher to 1.7 percent, marking the second consecutive acceleration and highest reading yet in 2015. Leading survey data and private-sector estimates suggest higher input costs and a broadly weaker Aussie Dollar have all put upward pressure on prices, bolstering the case for a firmer reading. Such a result may further undermine bets on imminent stimulus expansion, nudging the currency upward.

Follow-through on internally-driven moves may be hard to come by however as traders look outward for the week’s most potent catalyst, the FOMC policy announcement. The Fed’s rate-setting committee convenes as the gap between official prognostication and that of the markets grows wider. Most officials have continued to express a preference for raising rates in 2015 while investors have pushed out their bets further into the future, expecting “liftoff” no sooner than March 2016.

Chair Janet Yellen and company are unlikely to alter the policy mix next week. Indeed, an about-face reversal from the timid posture on display after September’s meeting is likely to send markets into a tailspin, an outcome the Fed was almost certainly trying to avoid by delaying tightening in the first place. If tightening in 2015 is truly on the agenda however, the central bank will have to set the rhetorical foundation for a December move.

Hawkish commentary will clash with market expectations and force a readjustment, probably weighing on risk appetite and punishing the sentiment-sensitive Australian unit. A dovish lean is likely to yield the opposite result, though follow-on momentum may be capped considering this would amount to convergence with an already priced-in outlook.

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