Fundamental Forecast for the Australian Dollar: Neutral
- Aussie Dollar Volatility Risk Skewed to the Upside on RBA Rate Decision
- US Jobs Data May Sink Aussie if Upbeat Reading Boosts Fed Liftoff Bets
- Find Critical Turning Points for the Australian Dollar with DailyFX SSI
The Australian Dollar edged lower for a third consecutive week against its US counterpart as a disappointing third-quarter CPI reading revived interest rate cut speculation while a hawkish FOMC statement amplified policy divergence headwinds by reviving talk of Fed tightening in December. Both themes will be on full display in the week ahead as the RBA issues its rate decision and top-tier US economic data comes across the wires.
OIS pricing implies traders see a 48 percent probability of a 25 basis point RBA interest rate cut. This means that volatility is likely regardless of what the central bank decides to do since a sizable contingent of investors will end up on the wrong side and be forced to readjust portfolios.
Options markets point to a negative positioning skew however, with traders willing to pay a premium for the right to sell the Aussie against all of its major counterparts compared with a right to buy it. On balance, that hints that upside follow-through may be greater on the upside in the event of a hawkish result versus the alternative.
On the external front, a busy week of US economic activity data will set the stage for October’s Employment figures. Consensus forecasts call for a 180,000 increase in non-farm payrolls to mark the highest increase in hiring in three months.
US news-flow has cautiously improved relative to expectations in the past month, recent disappointments notwithstanding. That cautiously hints at an upside surprise may be in the cards. With that said, realized payrolls numbers have trailed survey estimates by an average of 31.5k since the beginning of the year, warning against exuberant optimism.
An upbeat result is likely to increase the likelihood of an FOMC interest rate hike at next month’s policy meeting in the minds of investors. That is likely to push the US Dollar broadly higher, including against the Aussie. Losses may be compounded if the prospect of US tightening against a backdrop of slowing global performance weighs on risk appetite, amplifying selling pressure on the sentiment-linked currency. Needless to say, a soft print will probably yield the opposite dynamics.