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Aussie Dollar Still Vulnerable After Largest Drop in Three Weeks

Aussie Dollar Still Vulnerable After Largest Drop in Three Weeks

2016-05-07 01:45:00
Ilya Spivak, Head Strategist, APAC
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Aussie Dollar Still Vulnerable After Largest Drop in Three WeeksAussie Dollar Still Vulnerable After Largest Drop in Three Weeks

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar vulnerable to deeper losses after largest drop in a month
  • Thin data docket may leave room for follow-through on risk aversion
  • US Retail Sales, Chinese CPI figures may emerge as downside triggers

Losing money trading the Australian Dollar? This might be why!

The Australian Dollar faced heavy selling pressure after the RBA unexpectedly cut the benchmark lending rate to 1.75 percent and subsequently hinted at further easing on the horizon in its Monetary Policy Statement. The currency suffered the largest weekly drawdown in a month, retreating back below the 0.74 figure against its US counterpart.

The economic calendar thins out in the week ahead, leaving the Aussie to digest recent volatility. Broad-based worries about the pace of global economic growth appeared to become more acute last week. Stocks declined and Fed rate hike bets deteriorated but the US Dollar firmed, pointing to the return of a particularly serious brand of risk aversion that has concerns about liquidity overshadow the expected path of interest rates (i.e. prospects for return on assets).

This was punctuated by a deeply disappointing set of US employment figures. The world’s largest economy added just 160k jobs in April, falling short of the expected 200k increase. With few high-profile data points on the docket to break momentum, this may translate into risk-off follow-through as capital pours out of cycle-sensitive assets in search of safety. Needless to say, such a scenario bodes ill for the sentiment-linked Australian unit.

Turning to scheduled event risk, the RBA’s overt focus on flailing inflation readings may put outsized emphasis on May’s Consumer Inflation Expectations survey. A steep drawdown may encourage bets on continued easing, punishing the Aussie. Externally, a pickup in China’s headline inflation rate may compound selling pressure, hinting that Beijing has comparatively less room to expand monetary stimulus.

An expected pickup in US Retail Sales may boost sentiment and offer a lift to commodity bloc FX. Us economic news-flow has increasingly disappointed relative to consensus forecasts over the past month however, warning that a downside surprise is a potent danger.

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