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Australian Dollar Faces Potential Local CPI and US GDP Miss

Australian Dollar Faces Potential Local CPI and US GDP Miss

Daniel Dubrovsky, Strategist
Australian Dollar Faces Potential Local CPI and US GDP Miss

Australian Dollar Fundamental Forecast: Neutral

Talking Points:

  • Australian Dollar paid more attention to sentiment last week than relevant economic data
  • Local CPI and US GDP could disappoint, taking the currency one way and then another
  • This opens the door for risk trends to take the spotlight for the Australian Dollar yet again

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The Australian Dollar was on its way to finish another week higher against its US counterpart. It did show some temporary weakness on softer Chinese industrial production figures and a rather disappointing local jobs report. However, it recovered in both instances in the aftermath. It wasn’t until closer towards the end of the week when things went south.

A pickup in hawkish Fed rate hike expectations, which were fueled by comments from Lael Brainard, boosted the US Dollar and the 10-year government bond yield rose to a 2-month high. The appeal of these assets relatively speaking hurt stocks as the S&P 500 declined about 0.6%. The sentiment-linked Aussie Dollar fell to its lowest point against its US cousin since April 10th.

Perhaps this speaks to what the currency is more interested in, and brings us to what next week has to offer. The Reserve Bank of Australia is at the moment in no rush to adjust monetary policy. In fact, RBA’s minutes from their April rate decision reiterated this. Taking that into consideration, this may have been why there was a lack of follow-through from the Australian Dollar to last week’s Chinese and local economic statistics.

But there is one kind of data that may have a more pronounced effect on the Aussie. On Tuesday, we will get Australia’s first quarter inflation report. There, the headline rate is expected to rise to +2.0% y/y from 1.9% in the fourth quarter. Such an outcome would mean price growth in the lower boundaries of the RBA’s 2 – 3 percent target. Data out of the country has been crossing the wires below economists’ expectations as of late. If a similar situation reduces the urgency for the RBA to consider hiking, then the Aussie Dollar could fall.

Since both the Australian Dollar and its US counterpart have relatively higher yields in the FX majors spectrum, a loss of interest in the latter bodes well for the former and vice versa. For the greenback, on Friday we will get the first estimate of US first quarter GDP. With Mrs. Brainard and the beige book painting a rosy picture of the outlook, softer growth figures could hurt the greenback and boost the Aussie. This may be the case, like with Australian data, US ones have also been tending to underperform.

Last but not least, keep an eye out for risk trends. As we saw last week, the Australian Dollar is quite vulnerable. Even more so than to economic data potentially. Catalysts that may stoke volatility on this front include more US earnings (Amazon.com, Microsoft, Facebook) and trade developments. A wildcard could come from the Hong Kong Monetary Authority(HKMA). Last week, stocks rose despite their sudden action to defend their currency peg, the Australian Dollar rallied. With that in mind and taking into account these considerations, the Australian Dollar fundamental forecast will have to be neutral.

Australian Dollar Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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