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Australian Dollar May Suffer Deeper Losses on Fed Rate Hike Bets

Australian Dollar May Suffer Deeper Losses on Fed Rate Hike Bets

2016-09-10 00:08:00
Ilya Spivak, Head Strategist, APAC
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Australian Dollar May Suffer Deeper Losses on Fed Rate Hike Bets

Fundamental Forecast for the Australian Dollar: Bearish

  • Australian Dollar fails to hold up after spiking to three-week high
  • Swelling Fed rate hike speculation may compound selling pressure
  • Upbeat Australian jobs data unlikely to see strong follow-through

What do past AUD/USD trading patterns hint about on-coming price trends? Find out here.

The Australian Dollar failed to sustain a spirited recovery that brought prices to the highest since mid-August, reversing the advance and finishing the week in the red. The surge found fuel in an RBA policy announcement that betrayed no sign of a rate cut looming in the near term. Disappointing service-sector ISM data also weighed on Fed rate hike bets, adding to support for the yield-sensitive Australian unit. The subsequent selloff tracked a sharp drop in stock prices that seemed to reflect renewed fears of an imminent Fed rate hike. Hawkish comments from Dallas and Boston Fed Presidents Robert Kaplan and Eric Rosengren reinforced this narrative.

Fed policy speculation will remain in the spotlight early next week as all eyes turn to a speech from Governor Lael Brainard. The outing was hastily scheduled for the last possible time before the two-week blackout period when central bank officials refrain from commentary ahead of this month’s FOMC policy announcement. Brainard is widely considered the most dovish of the voters on the rate-setting committee. If she parrots the hawkish tone of recent remarks by her colleagues, the markets may surmise that the group is truly of one mind about stimulus withdrawal resumption and upgrade tightening probabilities further. Needless to say, such a scenario bodes ill for the Australian Dollar.

The publication of Retail Sales and CPI figures as well as the University of Michigan’s consumer confidence gauge may dilute conviction however. US economic news-flow has increasingly underperformed relative to consensus forecasts over since late July. This hints that economists’ models envision a rosier landscape than what has been confirmed by reality, opening the door for further downside surprises. Soft data outcomes may rekindle skepticism about the Fed’s conviction. After all, it would be hardly unprecedented for policymakers to whip up hawkish sentiment only to back down at the last minute. This may temper would-be Aussie losses sustained on the back of saber-rattling rhetoric. Alternatively, a turn to the upside on the data front – particularly if CPI shows unexpected strength – may only compound selling.

Turning to the domestic front, Augusts’ Employment report takes top billing. The baseline forecast suggests the economy added 15k jobs on net last month, marking a bit of a slowdown from the 25.3k increase in July, while the jobless rate remained unchanged at 5.7 percent. Realized outcomes on Australian economic data releases have cautiously improved relative to analysts’ projections recently, hinting that an outcome north of expectations may be in the cards. While such a result may offer the Aussie a bit of a lifeline, lasting follow-through seems unlikely. With that RBA already signaling a wait-and-see posture but surely nowhere near contemplating a rate hike, the near-term FX implications of a firm jobs print are probably limited at best.

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