Australian Dollar Rebound to be Tested by RBA Minutes, FOMC

DailyFX

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Forex_Australian_Dollar_Rebound_to_be_Tested_by_RBA_Minutes_FOMC_body_Picture_5.png, Australian Dollar Rebound to be Tested by RBA Minutes, FOMC

Fundamental Forecast for Australian Dollar: Bullish

  • Aussie Dollar Rebound Launched Alongside Shift in DailyFX SSI on China Stabilization
  • RBA Meeting Minutes Sought for Confirmation of a Shift to Neutral on Rates Outlook
  • FOMC Rate Decision May Undermine Aussie Recovery if Fed Signals “Taper” Cycle

We’ve argued in favor of a significant Australian Dollar recovery since early August. We noted that an improvement in Chinese news-flow will probably help stabilize economic growth expectations for the East Asian giant. China is Australia’s largest trading partner and a critical source of demand for the country’s pivotal mining sector. That meant that stabilization in China was likely to translate into an improved the outlook for Australian exports and the business cycle overall. This in turn would prompt a supportive shift in RBA monetary policy expectations and lay the groundwork for an Aussie recovery. The case for an upside scenario seemed all the more compelling given a backdrop of highly over-extended speculative net-short positioning and we proceeded to enter long AUD/USD after an attractive technical setup presented itself.

A cautious recovery now seems to be underway as expected. However, the week ahead will see the Aussie’s resilience severely tested as the currency takes on high-profile event risk on both the domestic and the global front. Minutes from September’s RBA policy meeting are first to cross the wires. That sit-down produced what the markets interpreted as a shift away from an overtly dovish posture to a neutral one, sending the Australian unit sharply higher and igniting pent-up bullish forces waiting for their cue to overtake momentum. With that in mind, traders will be keenly interested to parse the minutes for confirmation of the tone shift gleaned from the initial policy statement. It is rather rare for RBA meeting minutes to deviate materially from the Governor’s remarks released along with the rate decision. The potential for volatility remains however, and a stray comment that is perceived to amplify or undermine the latest improvement in the Aussie’s policy profile can send the currency higher or lower, respectively.

Thereafter, macro-level forces come into focus as all eyes turn to the Federal Reserve as the policy-setting FOMC committee convenes for its monthly meeting. The outing is expected to produce the first “taper” of the QE3 stimulus program, with the baseline scenario calling for a $10-15 billion cutback in monthly asset purchases. The path forward beyond that remains highly uncertain however. That means the FOMC’s updated set of economic forecasts as well as Chairman Ben Bernanke’s press conference following the policy decision will be surrounded with plenty of speculation and offer ample fodder for volatility. If investors are met with Fed rhetoric that (directly or indirectly) argues in favor of a sustained QE reduction cycle into the end of the year, market-wide risk sentiment is likely to deteriorate and pull the Aussie Dollar downward. A more cautious approach that presents a Fed that still sees stimulus withdrawal as highly data-dependent and injects uncertainty into the near-term policy outlook stands to produce the opposite dynamic.

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