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Fundamental Forecast for Australian Dollar: Neutral
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AUD Set For Another Flat Finish Despite Plenty Of Intraday Volatility
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Light Economic Docket May Do Little To Shift RBA Policy Bets
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Low Vol. Environment Could Continue To Support Carry Demand
The Australian Dollar is set for a relatively flat finish after a turbulent week that yielded plenty of intraday volatility. An upside surprise to the Australian second quarter core CPI reading, and rise in headline inflation to the top of the RBA’s 2 to 3 percent target band, sent the currency soaring above the 94 US cent handle. Additional strength for the Aussie was found on the back of a bumper China PMI print, as well as an absence of ‘jawboning’ in a speech from RBA Governor Glenn Stevens. Ultimately, most of the gains proved short-lived, which may have reflected some hesitation from traders to push the currency into a region of noteworthy technical resistance.
Looking to the week ahead; Building Approvals and the Performance of Manufacturing Index figures represent the only medium-tier domestic economic data on the calendar. However, the leading indicators for the health of the local economy may do little to materially shift the rate outlook, meaning any reaction from the AUD may fail to find follow-through. Similarly, the Chinese manufacturing figures (also on tap) could generate another round of knee-jerk volatility on a surprise reading, yet likely hold do not hold the requisite power to leave a lasting impact on the currency.
Indeed, Stevens’ recent address reinforced the prospect of a ‘period of stability’ for the cash rate over the near-term. At this stage it appears unlikely the RBA will change its stance while it attempts to foster a rebalancing of the domestic economy.
Implied volatility remains near multi-year lows, suggesting traders continue to price in a relatively small probability of a major economic crisis occurring in the near-term. Traders are seemingly looking past the latest flare-up in geopolitical tensions and have returned to the hunt for yield. Against this backdrop the Aussie’s relative interest rate advantage remains a source of strength for the currency, and could continue to keep it elevated. This leaves the major threat for the AUD/USD to stem from the US Dollar side of the equation given several key pieces of US event risk ahead. Refer to the US Dollar outlook for insights into how the reserve currency may perform over the coming week.
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