Forex: Australian Dollar Braces for Volatility on US Data, RBA Meeting


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Fundamental Forecast for Australian Dollar: Neutral

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The widespread unwinding of QE-linked positioning across the financial markets remains at center stage for the Australian Dollar. Indeed, an index tracking the currency’s average value against its top counterparts has moved in near-lockstep with the plunge in the benchmark 10-year US Treasury bond since the idea of a near-term cutback in Fed asset purchases began to emerge as a central theme in late April. This points to ample scope for volatility in the week ahead as heavy-duty economic data emerges on the US calendar.

First up on the docket is June’s ISM Manufacturing gauge. Expectations suggest activity in the factory sector recovered to post a modest increase after unexpectedly contracting in the prior month. The service-sector ISM composite is likewise expected to show improvement later in the week. Indeed, economists are penciling in an outcome that puts the pace of non-manufacturing activity growth at the fastest in three months.

The rabidly followed US Employment report closes the week. Here, consensus forecasts call for a slight slowdown in job creation, with nonfarm payrolls adding 165,000 in June compared with 175,000 in May. As we have seen over recent weeks, the markets are treading supportive US data bolstering the case for stimulus reduction, which means such outcomes bode ill for the Australian Dollar (and vice versa).

Top-tier scheduled event risk on the domestic front has scope to amplify Fed-driven price action. Most notably, the RBA is due to deliver its monthly policy announcement. Investors’ expectations are leaning toward a status-quo outcome, with the chance of another 25bps rate hike priced in at 21 percent. That puts the spotlight on the accompanying statement from RBA Governor Glenn Stevens.

Traders are baking in at least one more cut over the course of the coming 12 months and will be watching for guidance on the timing of the next reduction. Needless to say, a relatively dovish tone is likely to amplify selling pressure facing the Aussie Dollar while more measured rhetoric may prove supportive. Expectations for China’s Manufacturing PMI data set cast a dark shadow over the domestic growth outlook however, with deterioration seen on both the official and HSBC measures of factory-sector activity.

From a positioning stand-point, the latest update to the CFTC Commitment of Traders (COT) report shows that while speculative bets against the Aussie remain near a record high, the pace of growth in net short exposure has dropped off considerably. This may point to a market that is becoming disproportionately sensitive to counter-trend news, suggesting that volatility risk is on the upside in the event that news-flow spooks the bears and sets off profit-taking.

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