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Aussie Dollar to Track Risk Trends on Fed Outlook, Brexit Bets

Aussie Dollar to Track Risk Trends on Fed Outlook, Brexit Bets

2016-05-21 01:35:00
Ilya Spivak, Head Strategist, APAC
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Aussie Dollar to Track Risk Trends on Fed Outlook, Brexit Bets

Fundamental Forecast for the Australian Dollar: Neutral

  • Thin economic calendar leaves Aussie at the mercy of risk trends
  • US activity data, Powell comments to inform Fed rate hike views
  • “Brexit” polling increasingly focus as referendum looms ahead

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A lull in high-profile event risk leaves the Australian Dollar without readily-available fundamental catalysts in the week ahead. This puts prices at the mercy of risk sentiment trends as financial markets continue to focus on establishing big-picture narratives leading up to potentially explosive volatility next month.

Prospects for a Federal Reserve interest rate hike at the June or July policy meetings jumped last week on the back of overtly hawkish rhetoric from central bank officials in speeches and within minutes from April’s FOMC meeting. Investors now see a better-than-even chance of an increase by July having previously discounted tightening at least until December.

From here, May’s flash US PMI readings, the Durable Goods Orders report and revised first-quarter GDP figures will inform investors on the Fed’s wherewithal to make good on its aggressive language. US data outcomes have cautiously improved relative to consensus forecasts over the past week, opening the door for upside surprises that may bolster tightening bets and trigger risk-off trade, weighing on the Aussie.

On the Fed-speak front, traders will be keen to evaluate remarks from Governor Jerome Powell. Presidents of regional Fed branches have seemed consistently more hawkish than the three members of the Board of Governors outside of Chair Yellen and Vice Chair Fischer. If Mr. Powell’s remarks mirror the hawkish tone of last week’s commentary, they may go a significant way toward boosting the probability of an imminent hike in the minds of investors.

The looming “Brexit” referendum represents the other major theme in play. A poll of polls by the Financial Times shows 47 percent of respondents now favor the UK staying within the EU while 41 percent back leaving it. As the June 23 vote draws closer, pre-positioning is likely to become more active and updated polling numbers will probably stoke a greater degree of volatility.

Gains for the “Bremain” camp are likely to prove supportive for risk appetite and the Aussie alike, while increased chances of a “Brexit” outcome generate the opposite results. Whatever the merits of the arguments on either side of the debate, financial markets loathe uncertainty. With that in mind, it seems only logical that investors would prefer the status quo to an unprecedented exit of a major member state out of the EU.

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