Fundamental Australian Dollar Forecast: Neutral

  • With domestic rates deemed on hold for a long time, the Australian Dollar is more than usually subject to global risk appetite
  • This week offers Chinese growth data and domestic employment figures
  • If they don’t disappoint. AUD/USD’s decline could slow

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The Australian Dollar has been caught between international crosswinds for a while now, and it’s easy enough to see why this might be.

Futures market pricing suggests that the Reserve Bank of Australia won’t raise the key Official Cash Rate from its 1.50% record low until well into 2019, and frankly the central bank has done nothing to disabuse markets of that view. Of course, it offers no explicit confirmation of futures positioning – no central bank would. But official pronouncements from the RBA certainly don’t quibble with it, nor do they suggest a central bank in any hurry to raise rates.

This sharp contrast between a US Federal Reserve still very much on track to tighten its own monetary policy is one key reason why AUD/USD has been stuck in a downtrend all year.

That tends to leave the impact of domestic Australian economic data blunted. Unless they can move the dial on rate expectations then there is only so far they can move the currency. In turn, that leaves the Australian Dollar more vulnerable than usual to external factors.

It certainly was last week when a more emollient tone on trade from China’s President Xi Jinping saw AUD/USD gain, only to inch back a little when tensions rose over possible Western military intervention in Syria.

Still, things might look a bit better for Australian Dollar bulls this week, with some key economic releases on tap. They probably can’t hope for much from the minutes of the RBA’s last monetary policy conclave. They are due on Tuesday but are likely to stick to well -worn themes, lauding gradual, sustainable growth but worrying about inflation weakness and low wages.

However, Chinese Gross Domestic Product Numbers are due on the same day. If they meet or exceed expectations then there could be some upside for the Aussie in its sometime role as liquid China proxy. Expectations centre around an annualized gain of 6.8%. Investors will also get a look at official Australian employment figures this week. If these come in strongly there could also be some knee-jerk upside for the currency even if the impact on rate expectations is negligible.

As you’ll see from the chart below AUD/USD is very close to the upper-limit of the downtrend channel which has marked 2018 so far. While it’s likely to remain in place as the broad backdrop, there seems little reason to assume it need deepen this week as long as the data don’t disappoint.

I’m going for a neutral call, therefore.

Australian Dollar Could Fight Back This Week If Data Hold Up

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--- Written by David Cottle, DailyFX Research

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