Australian Dollar Down Trend May Resume on Yellen TestimonyAustralian Dollar Down Trend May Resume on Yellen Testimony

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar retreats from one-month high after US jobs data
  • Yellen comments to drive relative policy bets, risk appetite trends
  • Are FXCM traders buying or selling AUD/USD? Find out here!

The Australian Dollar retreated after hitting a monthly high against its US counterpart last week. The initial rally played out against a backdrop pre-positioning ahead of the release of January’s US employment data, which markets expected to confirm a dovish shift in Fed policy outlook pricing out further rate hikes in 2016. When the figures actually crossed the wires however, traders were forced to rethink this scenario (as we suspected).

While the increase in nonfarm payrolls trailed forecasts and the previous month’s outsized advance was revised a bit lower, the unemployment rate ticked down unexpectedly even as the participation rate advanced. There was good news to be had on the wages front as well: average hourly earnings grew at a brisk pace of 2.5 percent year-on-year and December’s print was revised up to a multi-year high of 2.7 percent. Economists were projecting a reading of 2.2 percent ahead of the release.

The markets appeared to be clear-cut in their response. Fed Funds futures shifted to reflect recovery in the priced-in policy outlook, front-end bond yields rallied and the US Dollar moved broadly higher against its major counterparts. The benchmark S&P 500 stock index – a proxy for market-wide risk appetite – declined in tandem to reflect fears of on-coming tightening on the horizon.

Looking ahead, a lull in high-profile event risk on the domestic front will keep speculation about the likely path of US monetary policy at the forefront. The spotlight now falls to Fed Chair Janet Yellen, who will take turns delivering her semi-annual testimony to the Finance Committees of both chambers of the US Congress.

Needless to say, traders will be most interested in hearing from the central source of FOMC strategy on where policymakers intend to steer. Comments from various other central bank officials in recent days reflect a broadly deliberative posture. However, some are seemingly leaning toward a more cautious interpretation of recent market volatility while others are more readily dismissive of it as transitory.

Clues about where Yellen falls on this spectrum may prove formative for the near-term trajectory of risk sentiment trends and Australian Dollar alike. While the Chair will go out of her way to strike a balanced tone, her representation of the FOMC middle ground ought to prove instructive on where the majority consensus is leaning. Comments hinting that the Committee’s appetite for rate hikes has diminished less than that of the markets may weigh on risk appetite, sending the Aussie lower alongside stock prices.