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Australian Dollar Outlook Clouded as Prices Break from Policy Bets

Australian Dollar Outlook Clouded as Prices Break from Policy Bets

2015-11-21 02:14:00
Ilya Spivak, Head Strategist, APAC
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Australian Dollar Outlook Clouded as Prices Break from Policy BetsAustralian Dollar Outlook Clouded as Prices Break from Policy Bets

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar Rebound Continues as Prices Rise Most in 6 Weeks
  • Outlook Clouded as Aussie Decouples from Relative Rates Policy Bets
  • Find Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar continued to recover against its US counterpart, putting in the largest five-day advance in six weeks. Curiously, the currency rallied even as relative RBA vs. Fed monetary policy expectations shifted against it. The domestic side of the equation held largely static while the probability of an FOMC interest rate hike at the December policy meeting continued to swell, with traders now putting the probability of “liftoff” at 73.6 percent.

This makes for a clouded outlook in the week ahead as a quiet economic calendar on the homegrown front keeps external forces in the spotlight. Fed policy speculation seems likely to continue preoccupying traders. An upgrade of third-quarter US GDP figures as well as improvements in measures of consumer confidence and durable goods orders are expected ahead. That seems likely to offer additional fodder for December rate hike bets, amplifying the projected policy divergence between the US central bank and its G10 counterparts.

At surface level, one might suspect that this would bode ill for the Aussie Dollar even as traders question the likelihood of further RBA easing on the horizon. Last week’s counter-intuitive response to an analogous fundamental backdrop casts doubt on this however. A clear-cut explanation for prices’ apparent decoupling from policy trends is elusive at this point. Theories assigning blame to profit-taking or portfolio reallocation ahead of the year-end seem flimsy thus far. A likely liquidity drain ahead of the US market closure for the Thanksgiving holiday may only exaggerate ambiguity, so investors would be wise to tread carefully for now.

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