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Aussie Dollar Faces Perfect Storm of Domestic, External Pressure

Aussie Dollar Faces Perfect Storm of Domestic, External Pressure

2016-02-27 02:22:00
Ilya Spivak, Sr. Currency Strategist
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Aussie Dollar Faces Perfect Storm of Domestic, External PressureAussie Dollar Faces Perfect Storm of Domestic, External Pressure

Fundamental Forecast for the Australian Dollar: Bearish

  • Aussie Dollar may fall on dovish RBA rhetoric, soft GDP data
  • Firm US jobs report may stoke Fed rate hike bets, sink Aussie
  • Where will AUD/USD trend this year? See our 2016 forecast!

Home-grown event risk looms large for the Australian Dollar in the week ahead as the RBA delivers a monetary policy announcement and fourth-quarter GDP figures cross the wires. External event risk is not to be dismissed however, with high-profile US and Chinese releases also on tap.

Australian economic news-flow has notably softened relative to consensus forecasts since February’s RBA sit-down. While this is unlikely to trigger a cut this time around, it may inspire a dovish shift in the central bank’s rhetoric and weigh on the currency. As it stands, traders price in 43 basis points in easing over the coming 12 months, implying at least one rate cut and an 86 percent probability of two by this time next year.

Weakness may be compounded if the GDP report falls in with the recent trend in data underperformance. Output is expected to grow 0.5 percent, marking a slowdown from the 0.9 percent gain in the three months through September.

On the external front, February’s US Employment report takes top billing. Realized US economic data outcomes have markedly improved compared with expectations since the beginning of the month, hinting that analysts may be underestimating the economy’s vigor and opening the door for an upside surprise. Payrolls seen rising 190k, marking a significant improvement over January’s disappointing 151k gain (the smallest in four months).

Wage inflation figures ought to be watched even closer than the headline figure however. Indeed, it is sluggish price growth that has bedeviled the Fed as it moves to cautiously scale back crisis-era stimulus, not the labor market. If average hourly earnings mirror recent upticks on US CPI and PCE price growth measures, the markets may be forced to reconsider 2016 interest rate hike probabilities.

Investors have been dubious of the chance for even one 25bps increase. If earnings growth accelerates beyond the 2.5 percent year-on-year rate recorded last month, a swift readjustment of portfolios to account for a more hawkish FOMC posture is likely to ensue. This is likely to bode ill for the Aussie on two fronts. First, it will shift RBA vs. Fed policy divergence bets further into the greenback’s favor. Second, it is likely to weigh on risk appetite, weighing on the sentiment-linked Australian unit.

Chinese data rounds out the week as official and private-sector versions of February’s PMI surveys are released. Expectations point to relative few changes in the pace of manufacturing- and service-sector growth, but recent disappointments on data releases out of the world’s second-largest economy warn of downside surprise possibilities. While such results are likely to play second fiddle to Australia’s own event risk docket, they may serve to amplify pressure if an increasingly dovish outlook punishes the Aussie.

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