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Australian Dollar Locked in Limbo as US Election Looms Large

Australian Dollar Locked in Limbo as US Election Looms Large

2016-11-04 23:43:00
Ilya Spivak, Head Strategist, APAC
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Australian Dollar Locked in Limbo as US Election Looms Large

Fundamental Forecast for the Australian Dollar: Neutral

  • Neutral RBA, hawkish Fed ought to be pushing AUD/USD lower
  • Aussie locked in range as US election uncertainty sways markets
  • Even a clear-cut winner on Nov 8 may leave Aussie indecisive

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The Australian Dollar continues tread water in a narrowing range below the 0.78 figure against its US counterpart despite a seemingly ample stock of trend-defining catalysts. On the domestic front, a broadly stable economic landscape has translated into a firmly neutral monetary policy outlook. The RBA confirmed as much in its latest policy announcement, setting out the case for a wait-and-see approach in the months ahead.

Meanwhile, the FOMC has signaled a preference to move forward with a rate hike in December. October’s US jobs report seemed to bolster the case for tightening: payrolls growth held broadly on-trend despite a slight miss relative to consensus forecasts but wage inflation jumped to a seven-year high of 2.8 percent. Tellingly, the monthly job gains average began to trend lower at the same time as pay growth started to accelerate early last year, pointing to tightening labor markets and beckoning stimulus withdrawal.

Indefinite standstill at the RBA and a hawkish Fed posture ought to have been unambiguously negative for AUD/USD. That this has not materialized seems to reflect the tug of war between competing forces unleashed by the proximity of the US presidential election. Increased uncertainty about the outcome triggered by a tightening of the polls just before voting day has sparked aggressive risk aversion and punished the US Dollar simultaneously, leaving the typically sentiment-geared Aussie caught in the balance.

The deadlock seems unlikely to be broken until US voters have said their peace. This may not necessarily offer immediate direction however as the greenback recovers alongside risk appetite, inverting current dynamics but yielding the same conflicted outcome. Complicating things further, the polls are close enough that an inconclusive election result echoing the Bush/Gore fiasco in 2000 is not an entirely remote possibility. On balance, all this makes for a clouded landscape and traders would be wise to tread cautiously.

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