Fundamental Forecast for Australian Dollar: Bullish
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The outline of the argument in favor of a significant Australian Dollar recovery remains unchanged from what we have discussed over recent weeks. Stabilization in Chinese economic news-flow has helped drive moderation in the RBA interest rate cut outlook. This against a backdrop of overextended net-short speculative positioning continues to argue for a bounce. Indeed, the latest COT figures suggest a cautious unwinding may have already begun. Technical positioning appeared attractive last week and we enteredlong.
Traders are now pricing in a mere 6 percent probability of another rate cut at the September policy meeting (according to data from Credit Suisse). More noteworthy still, a dramatic improvement in the 1-year outlook over recent weeks shows investors to no longer expect any further easing over the next 12 months. The stock of policy-shaping news-flow is relatively light in the coming days, suggesting a meaningfully dovish shift in the markets’ forecast is unlikely. July’s HIA Home Sales and Private Sector Credit figures as well as the second-quarter Capital Expenditure print round out the docket.
The threat of interference from external factors remains acute however. Speculation surrounding the Federal Reserve’s intentions to “taper” the size of its monthly stimulus effort remains a key consideration. Minutes from July’s FOMC meeting seemed to reinforce status-quo expectations of a small $10 billion reduction in September. The spotlight is now on commentary from the Jackson Hole Economic Summit running throughout the weekend, followed by a busy schedule of official commentary throughout the week. FOMC voting members John Williams and James Bullard as well as non-voter Jeffrey Lacker are all on tap.
The Australian Dollar price action has been somewhat detached from sentiment appetite trends recently, with near-term correlation studies between the currency and the benchmark S&P 500 stock index showing negligible readings. That can rapidly change if policy speeches in Wyoming or commentary throughout the week give sentiment a clear, well-supported fundamental bearing. A strong dovish message countering consensus Fed policy expectations 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.