Fundamental Forecast for Australian Dollar: Bullish
The Australian Dollar has mounted a recovery amid eroding interest rate cut expectations. The RBA began pouring cold water on stimulus bets two week ago, with 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 initially reinforced the RBA’s position and last week’s blowout employment figures pushed the process along, with traders no longer pricing in any easing over the next 12 months having expected as much as 50bps in cuts just a week ago (according to data from Credit Suisse).
Looking ahead, the economic calendar is relatively quiet. On the domestic front, the spotlight will return to the RBA as the central bank releases minutes from the March policy meeting. This is not typically market-moving, amounting to a somewhat more involved restatement of the themes already unveiled in the statement released immediately following a rate decision. This time may be different however considering the conflicting commentary on the merits of further easing from RBA bigwigs ahead of the sit-down. If the minutes reveal significant internal divisions about the appropriate course of policy within the bank, some of the Aussie’s recent gains may prove fleeting as the shift toward “neutral” begins to appear uneasy.
Meanwhile, the unwinding of rate cut bets has encouraged the Australian unit to re-couple with risk appetite trends as investors are once again drawn to the highest benchmark yield in the G10 FX space. That puts the onus on the FOMC policy announcement in the week ahead as traders continue to size up the resilience of the US recovery, weighing a recent run of supportive economic data with mounting fiscal headwinds following a tax increase in January and the onset of “sequester” spending cuts this month.
Investors appear to have treated supportive US economic news as limiting the scope for Federal Reserve stimulus over recent weeks, with the US Dollar tellingly rising alongside stocks when high-profile reports (notably the NFP release) crossed the wires. The markets’ own consensus forecasts don’t seem to justify this dynamic however. A poll of private-sector economists from Bloomberg shows they expect US growth to slow to 1.9 percent this year from 2.2 percent in 2012 while the jobless rate prints at 7.7 percent and inflation holds at 1.8 percent, well off the Fed’s “Evans rule” parameters for unwinding stimulus.
With that in mind, even a familiarly dovish FOMC statement seems to have scope to jolt traders back to the realization that the Fed is in no hurry to taper asset purchases or otherwise pare back stimulus efforts. That is likely to bolster optimism about performance in the world’s top economy, proving broadly supportive for risk appetite. It likewise stands to undermine recent support for the US Dollar, casting it once again as a funding currency alongside the Japanese Yen and underscoring the comparative attraction of higher-yielding alternatives including the Aussie.