Fundamental Forecast for the Australian Dollar: Neutral
- Aussie Dollar pares losses after dropping to lowest in almost 4 years
- Updates on Fed, ECB outlook to drive Aussie alongside risk appetite
- Has the Aussie moved as DailyFX analysts expected? Find out here!
The Australian Dollar dropped to the lowest level in close to four years against its major counterparts but prices launched a sharp recovery against the backdrop of a late-week rebound in risk appetite, erasing more than half the decline. Looking ahead, a busy docket of high-profile event risk offers ample scope for continued volatility.
On the domestic front, minutes from February’s RBA policy meeting and January’s employment report are in focus. The latter seems like a more potent catalyst for price action than the latter: RBA minutes rarely offer much by way of new content beyond the policy statement released at the time of the rate decision. A neutral tone there and in subsequent testimony from Governor Glenn Stevens is likely to see the markets focused on economic data.
Labor market figures are expected to show a net 13k jobs gain while the unemployment rate holds unchanged at 5.8 percent. Australian economic news-flow has stumbled relative to consensus forecasts over recent weeks and markets have taken notice, with the priced-in 12-month RBA rate path implied in overnight index swaps shifting deeper into dovish territory. Leading survey data suggests hiring weakened in the first month of 2016, opening the door for more of the same and threatening the Aussie.
Turning outward, global monetary policy trends and their influence on market-wide risk sentiment remain a critical consideration. Europe will share the spotlight with the US this time around as ECB President Mario Draghi testifies before an EU Parliament committee and the central bank releases minutes from January’s meeting. In both cases, traders will be keen to glean additional clues suggesting an expansion of stimulus is on tap in March. Comments to that affect are likely to boost overall risk appetite, offering support to the sentiment-linked Aussie.
On the US side of the equation, minutes from January’s FOMC meeting as well as the CPI data set are in the spotlight. The former will help shed light on the degree to which policymakers feel recent volatility has undermined their projected rate hike path. Last week’s comments from Chair Yellen suggested a deliberative posture but highlighted that officials are not as dovish as the priced-in market view implies. Investors have slashed policy bets to erase any further tightening from the 2016 outlook. The latter will help gauge whether the Committee has sufficient scope to act.
Leading survey data paints a relatively upbeat picture of price growth trends. Service-sector inflation – while still tepid – firmed for a fourth consecutive month. Meanwhile, manufacturing sector output prices grew at the fastest pace since August. If this translates into an uptick on the pace of core year-on-year CPI expansion against backdrop of Fed rhetoric extolling data dependence, returning rate hike bets may hurt risk trends and the Aussie Dollar alike.