Australian Dollar Rebound Threatened Amid Fed Policy Speculation
Fundamental Forecast for Australian Dollar: Bullish
Capitalize on Shifts in Market Mood with the DailyFX Speculative Sentiment Index.
The broad outlines of the argument in favor of a larger Australian Dollar recovery remains essentially unchanged from last week. Moderation in the RBA interest rate cut outlook on the back of stabilization in Chinese economic news-flow against a backdrop of over-extended net-short speculative positioning still looks likely to make for a corrective bounce. Indeed, the latest COT figures suggest the unwinding may have begun and technical positioning appears supportive, prompting us to enter long.
Traders are now pricing in a mere 12 percent probability of another rate cut at the September policy meeting (according to data from Credit Suisse). More noteworthy still, investors’ implied 1-year outlook no longer calls for any easing over the coming 12 months having pointed to at least one more 25bps reduction as recently as last week. Policy-shaping event risk appears relatively benign in the coming days, suggesting a meaningfully dovish shift in the markets’ forecast seems unlikely.
Minutes from RBA meetings tend to stick close to the policy statement released at the time of the rate decision so the publication of Augusts’ record ought to reinforce perceptions of a nudge toward neutral when it crosses the wires. Meanwhile, the HSBC gauge of Chinese manufacturing sector activity is expected to show improvement in August. In fact, economic data from the East Asian giant has performed increasingly well relative to expectations since late June, opening the door for an upside surprise.
The threat of interference from external factors looks to have grown however. Speculation surrounding the Federal Reserve’s intentions to “taper” the size of its monthly stimulus effort is likely to heat up as the central bank releases minutes from Augusts’ FOMC meeting and the Jackson Hole Symposium kicks off in Wyoming. The Australian Dollar price action has been somewhat detached from risk appetite trends recently. That can rapidly change if commentary from the Minutes or one of the policy speeches in Wyoming gives sentiment a clear, well-supported fundamental bearing.
As it stands, various surveys of economists seem to suggest the consensus view is that the first QE cutback will indeed occur in September but in relatively small size, perhaps reducing asset purchases by only $10 billion per month. A strong dovish message countering that status quo may produce a broad-based swell in risk appetite that pulls the Aussie higher, but a hawkish one could have an equally negative impact as sentiment-geared assets sink.
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