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Australian Dollar Torn Between RBA Bets, Sentiment TrendsTitle

Australian Dollar Torn Between RBA Bets, Sentiment TrendsTitle

2016-05-14 02:52:00
Ilya Spivak, Head Strategist, APAC
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Australian Dollar Torn Between RBA Bets, Sentiment TrendsTitleAustralian Dollar Torn Between RBA Bets, Sentiment TrendsTitle

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar may correct higher if jobs report tops forecasts
  • RBA meeting minutes to offer clues on further easing prospects
  • US CPI data may trigger risk aversion, weigh on Aussie Dollar

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The Australian Dollar declined for a second consecutive week, falling to the lowest level since late February against its US counterpart. Follow-through is far from assured however as a docket of high-profile event risk threatens to disrupt momentum in the days ahead.

On the domestic front, April’s Employment report is in the spotlight. Expectations call for net increase of 12,000 jobs to mark a slowdown from the 26,100 gain recorded in the prior month. The unemployment rate is seen ticking higher to 5.8 percent from 5.7 percent previously.

Australian economic data has cautiously improved relative to consensus forecasts over recent weeks. Encouragingly, this has happened even as estimates edged upward, hinting at firming performance. Meanwhile, leading survey data is mildly encouraging, opening the door for an upside surprise.

This may weigh against interest rate cut speculation, helping the Aussie to correct upward. As it stands, traders price in at least 25 basis points in further easing and an 80 percent chance of 50 basis points in cuts over the coming 12 months. The implied probability of a rate reduction in June stands at 20 percent.

Minutes from May’s RBA policy meeting are also on tap. Traders will be keen to dig into the logic behind the central bank’s surprise reduction of the baseline cash rate to a record-low 1.75 percent as they try to decipher if the move was a precautionary one-off or the start of a larger easing cycle.

Externally, US CPI figures take top billing. The headline inflation rate is seen rising to 1.1 percent year-on-year while the core reading excluding energy and food ticks slightly down from 2.2 to 2.1 percent. Most interestingly, the headline versus core spread is due to shrink to a three-month low of 1 percent.

A narrowing gap between the broader and narrower inflation metrics lends credence to the Fed’s argument that transitory headwinds capping price growth will unwind, opening the door for a more hawkish policy stance. Evidence to this effect may boost near-term tightening bets.

The prospect of a more hawkish US central bank bodes ill for risk appetite at a time when investors seem increasingly concerned about a broad-based slowdown in global economic growth. As such, news-flow to that effect may send the sentiment-sensitive Aussie lower alongside share prices.

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