Fundamental Forecast for Australian Dollar: Bullish
The Australian Dollar finds itself re-coupling with risk appetite trends as the specter of interest rate cuts is chased off by the Reserve Bank of Australia and investors are drawn to the highest yields in the G10 FX space. The central bank poured cold water on stimulus expectations last week, with RBA Governor Glenn Stevens saying that while an “accommodative stance of monetary policy is appropriate,” it appeared “prudent” to keep rates unchanged for now while the “substantial easing of policy as a result of previous decisions” works its way into the economy. Fourth-quarter GDP data reinforced the RBA’s position.
Looking ahead, the economic calendar is relatively quiet. On the domestic front, the focus will be on February’s Employment report. Expectations call for the economy to add 10,000 jobs, an outcome broadly in line with recent trends that is unlikely to materially change the outlook for monetary policy. A possible near-term headwind may emerge from Chinese CPI figures released over the weekend.
The report showed the year-on-year inflation rate unexpectedly accelerated to 3.2 percent in February, marking the highest reading in 10 months. That could create concerns about policy tightening that slows Chinese growth and hurts demand from Australia’s largest trading partner. Follow-through seems limited however considering the Beijing already unveiled measures to crimp the price growth in the property market while introducing fiscal stimulus in its 2013 budget last week.
Sizing up the macro sentiment landscape, the resilience of the US recovery in the face of headwinds from fiscal retrenchment following the onset of “sequester” spending cuts as well as lingering uncertainty in the Eurozone remain central themes. On the former side of the equation, a somewhat lackluster US data docket in the wake of last week’s robust ISM and NFP numbers is likely to allow optimism to remain well-supported. Indeed, CPI and UofM Consumer Confidence numbers are the only major standouts, with the former expected to keep inflation at paltry 1.8 percent – thereby leaving Fed stimulus expectations at status quo – while the latter produces the third consecutive uptick. In the Eurozone, a meeting an EU leaders’ summit at the end of the week is unlikely to prove eventful as the core issue at hand – the political upheaval in Italy – looks increasingly likely to drag on until another election is held in the summer.