Fundamental Forecast for Australian Dollar: Neutral
The Australian Dollar advanced for the third consecutive week a swell in risk appetite continued to feed demand for the sentiment-geared currency. A minor setback came by way of January’s deeply disappointing jobs report, the move lower failed to produce significant follow-through as we suspected last week and the post-data selloff was promptly overturned within a day. The currency appears vulnerable to renewed selling in the week ahead however and we have entered short AUD/USD at 0.90.
The lion’s share of the Aussie’s recovery over the past two weeks has mirrored a snap-back in risky assets as the traders digested and began to retrace the knee-jerk reaction to a bouquet of emerging-market jitters that emerged in late December. The S&P 500 and the VIX volatility index – investors’ so-called “fear gauge” – have now all but returned to where they started when the panic began. Furthermore, the latest positioning figures from the CFTC show speculators are once again net-long S&P 500 futures having been the most net-short in eight months as of February 4.
From here, big-picture trends ought to return to the spotlight, with the focus on the disparity between disappointing US economic data and the firm commitment to continue “tapering” QE asset purchases by the Federal Reserve. The week ahead brings the publication of minutes from January’s FOMC meeting as well as the US CPI data set. If comments from Fed officials over recent weeks are any indication, the US central bank is looking through the current soft patch in US performance and seemingly has no intention to slow or pause the process of reducing QE in $10 billion/month increments. Meanwhile, the headline year-on-year inflation rate is seen ticking up to a six-month high at 1.6 percent.
On balance, this bodes ill for the Australian unit. US economic news-flow has increasingly underperformed relative to expectations since mid-January. This coupled with rhetorical and data-based support for continued reduction in Fed accommodation is likely to fuel concerns about the implications of a prolonged deceleration in the world’s largest economy for the pace of global growth at large. Needless to say, that bodes ill for sentiment and has scope to initiate a far better-supported liquidation in the risky asset space than the transitory EM-driven selloff. – IS