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Aussie Dollar at the Mercy of Risk Trends on US, Eurozone Data

Aussie Dollar at the Mercy of Risk Trends on US, Eurozone Data

2016-02-20 03:05:00
Ilya Spivak, Sr. Currency Strategist
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Aussie Dollar at the Mercy of Risk Trends on US, Eurozone DataAussie Dollar at the Mercy of Risk Trends on US, Eurozone Data

Fundamental Forecast for the Australian Dollar: Neutral

  • Upbeat US PCE figure may hurt risk appetite, weigh on Aussie
  • Eurozone data hinting at more ECB QE may limit Aussie losses
  • Are FXCM traders buying or selling AUD/USD? Find out here!

The Australian Dollar managed a small gain last week, capitalizing on a recovery in risk appetite to overcome home-grown headwinds by way of a disappointing employment report. Looking ahead, a quiet economic calendar on the domestic front is likely to put external forces in the driver’s seat.

Federal Reserve monetary policy speculation remains the dominant macro-level theme at play. Priced-in expectations reflected in Fed Funds futures show traders now longer expect further tightening in 2016. This made for tepid reactions to last week’s cautiously deliberative Fed-speak.

Indeed, a further shift to the dovish side of the spectrum would imply bets on easing. Reversing December’s rate hike would imply a significant hit to the Fed’s credibility, so policymakers’ pain threshold before considering such action is almost certainly very high.

On balance, this means that soft results on a range of activity indicators due to cross the wires in the coming week are unlikely to inspire strong reactions from the markets. Alternatively, upbeat results that clash with the established status quo could inspire asymmetrically dramatic volatility as investors scramble to readjust portfolios.

The most potent of the data points on tap is January’s PCE measure, the Fed’s preferred gauge of inflation trends. The core year-on-year growth reading is expected to rise to 1.5 percent, an increase from December’s 1.4 percent result and the fastest pace in 14 months. Core CPI surprised on the upside for the same period (as we suspected). A similar outcome on PCE may help revive near-term stimulus removal fears, weighing on risk appetite and sending the Aussie lower alongside stock prices.

Elsewhere on the docket, the preliminary set of February’s Eurozone PMI surveys as well as the flash CPI reading will help inform bets on the likelihood of an expansion in ECB accommodation at next month’s policy meeting. Leading price growth indicators in the former will help signal what to expect from the latter. If the collective message from these outcomes increases the possibility that a larger QE effort is soon to be unveiled, that may underpin sentiment and offer support to the Australian unit.

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