Australian Dollar Faces Perfect Storm of Key Event Risk Ahead

Fundamental Forecast for the Australian Dollar: Neutral

• RBA Rate Decision, 3Q GDP Data Unlikely to Disrupt Existing Policy Bets
• ECB Meeting, Yellen Testimony and US Jobs Data Cloud Risk Trends View
• Identify Critical Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar faces a perfect storm of volatility in the week ahead as high-profile event risk on the homegrown and the external fronts looms ahead. Monetary policy considerations are first to take center stage, only to be replaced by churn in risk sentiment trends.

The RBA is expected to keep the benchmark lending rate unchanged at 2 percent at Tuesday’s meeting. This will put the focus on the accompanying policy statement and any forward guidance therein. A recent center-bound shift in the bank’s rhetoric degraded but has yet to destroy rate cut speculation.

Prevailing economic conditions are unlikely to have changed enough to trigger Governor Glenn Stevens and company to make a firm move out of wait-and-see mode. This points to a neutral policy statement echoing the data dependence of future actions, shifting the spotlight to the third-quarter GDP report due later in the week.

Output is seen rising 0.7 percent, an acceleration from the 0.2 percent gain in the three months through June. The year-on-year growth rate is seen edging up to 2.3 percent, marking recovery from the two-year low of 2 percent but still falling short of the long-term average in the 3-4 percent range. Absent a large upside surprise, the reading is unlikely to materially alter prevailing policy bets, at least for now.

Turning to external catalysts, the ECB is first to take center stage. President Mario Draghi is expected to unveil an expansion of policy support. A range of options ranging from expanding QE asset purchases to pushing the deposit rate deeper into negative territory has been hotly debated in recent weeks and investors will be keen to learn if officials decided to opt to a soft touch or a big-splash gesture.

On balance, the markets have been well-primed for some degree of easing, so the bar for a dovish surprise will be relatively high. That means the risk of a disappointment is probably disproportionately greater relative to the alternative. In that event, disappointed deterioration in sentiment trends may pressure the Aussie lower along with other risk-geared assets.

Finally, testimony from Fed Chair Janet Yellen and November’s US jobs report will guide the perceived probability of an FOMC rate hike in December. The chance of liftoff is already placed at 77.5 percent, making it relatively difficult to engineer a hawkish surprise, but sentiment’s inconsistent response to the building likelihood of stimulus withdrawal since mid-year makes for a clouded landscape. Knee-jerk volatility seems almost certain but its directional predilections are difficult to decipher.