Australian Dollar Aims Higher as Data Dents Rate Cut Outlook
Fundamental Forecast for Australian Dollar: Bullish
Australian Dollar volatility was relatively subdued last week compared to the other major currencies but a pickup in activity seems likely. April’s RBA rate decision reconfirmed a wait-and-see attitude from policymakers, making for a data-dependent environment as traders attempt to handicap the probability of another reduction in borrowing costs. Indeed, a Credit Suisse gauge tracking investors’ priced-in policy expectations over the coming year has been narrowly toeing the line between calling for a 25bps cut and no change in the benchmark lending rate since early March. Key data points from Australia and China will further stoke debate and offer an impetus for volatility in the week ahead.
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First, China’s Consumer Price Index reading is expected to show the year-on-year inflation rate slowed to 2.5 percent in March after spiking to a 10-month high at 3.2 percent in the prior month. That puts the pace of price growth back in line in line with the trend average. The overall trajectory has pointed to softening price growth since mid-2011, and a return to form that pains February’s print as a one-off aberration is likely to cap investors’ bets on Chinese monetary tightening. That bodes well for Australia, for whom the Asian giant is the largest export partner and key driver of demand for the critical mining sector, chipping away at RBA easing expectations and boosting the Aussie Dollar.
Next, Australia’s March Employment data is forecast to reveal a 7.5k decline in hiring while the jobless rate remains in place at 5.4 percent. Although this seems relatively tame after the economy added a whopping 71.5k jobs in the prior month, that outcome faced accusations of being over-inflated by a statistical anomaly. Estimates for an adjusted figure stripping out the alleged discrepancy put the February figure in the 10-12k range. If that is indeed accurate, a 7.5k drawdown begins to appear substantially more ominous. With that said however, data compiled by Citigroup suggests Australian economic news-flow has tended to outperform by an increasingly healthy margin relative to expectations since early February. That suggests analysts have tended to underestimate the economy’s position in the business cycle, leaving the door open for another upside surprise to drive the Aussie upward.
Correlation studies suggest the Australian Dollar’s sensitivity to underlying sentiment trends has considerably weakened recently as investors focus on the outlook for interest rates. Still, as one of the highest-yielding currencies in the G10 FX space, the currency may be swiftly engulfed in larger risk appetite swings. With that in mind, it seems prudent to be mindful of the evolution of key macro-level themes dominating financial markets. In the week ahead, the spotlight here falls onto US economic data as traders reeling from Friday’s disappointing NFP print look for added confirmation of an emerging downturn in the world’s largest economy and its implications for Federal Reserve policy. Retail Sales and UofM Consumer Confidence figures as well as minutes from last month’s FOMC meeting headline the calendar. The onset of the fourth-quarter corporate earnings season may likewise become a factor, with the spotlight on results from cycle-sensitive Alcoa Inc as well as Wells Fargo and JPMorgan.
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