Australian Dollar May Fall Further as Fed, RBA Divergence Deepens

Fundamental Forecast for the Australian Dollar: Bearish

• Aussie Dollar at Risk as Jobs Data Amplifies RBA Rate Cut Probabilities
• China Data Unlikely to Offset Pressure from Fed Rate Hike Speculation
• Find Critical Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar continued to sink, registering a fourth consecutive week of losses and hitting a monthly low against its US counterpart. External factors conspired against the currency even as the RBA shied away from an interest rate cut and signalled it is not in a rush to ease in the near term. Upbeat US jobs data inspired the bulk of the losses, with a swell in December Fed rate hike expectations amplifying policy divergence headwinds and sinking the Aussie as expected.

The landscape continues to look treacherous in the week ahead. October’s Employment report is forecast to show growth returned with a net increase of 15,000 jobs after the previous month’s decline, but an ever-steepening slide in realized data outcomes relative to consensus estimates over the past two months warns of disappointment. That may embolden bets on an RBA rate cut at the central bank’s next policy meeting, which are already elevated at 67 percent despite the sanguine rhetoric on display last week. Needless to say, this bodes ill for the Aussie.

A round of softer Chinese economic data seems unlikely to offer a meaningful countervailing force to selling pressure. Mild disinflation expected as October’s CPI data comes across the wires may not do much to stoke PBOC stimulus expansion bets after Beijing suggested a GDP growth floor of 6.5 percent envisioned in its next five-year plan. The world’s second-largest economy was expanding at a year-on-year pace of 6.9 percent as of the third quarter, meaning officials are unlikely to step up support as long as the velocity of on-coming deceleration is reasonably orderly. That is hardly helpful for the Australia, which counts China as its top export market and would probably enjoy spillover benefits from greater accommodation there.

Meanwhile, another busy calendar of scheduled Fed commentary seems likely to deliver a further jolt to rate hike speculation. The docket is heavily skewed toward established hawks (Bullard, Lacker, Mester) and newly-minted tightening enthusiasts (Williams, Dudley, Fischer, Yellen). The dovish contingent (Rosengren, Evans) will make itself known, but their predilections have been known for some time and probably won’t make too much of a stir around the markets. Coupled with expected improvements on the retail sales and consumer confidence fronts, this stands to embellish the divergence in Fed versus RBA policy bets, punishing the Australian unit.