Australian Dollar Charges Ahead, But the RBA May Trip the Rally Up

While many of the other majors are at or near their respective anti-dollar highs; the Aussie currency has already confirmed its bullish break. Now the fundamental and technical outperformer waits for either risk appetite to fuel follow through or find an alternative means of strength in market-wide US dollar selling.

Australian Dollar Charges Ahead, But the RBA May Trip the Rally Up

Fundamental Outlook for Australian Dollar: Bullish

While many of the other majors are at or near their respective anti-dollar highs; the Aussie currency has already confirmed its bullish break. Now the fundamental and technical outperformer waits for either risk appetite to fuel follow through or find an alternative means of strength in market-wide US dollar selling. The latter catalyst holds the greatest potential, thanks to the greenback’s precarious position; but don’t overlook risk trends should the markets start moving as the direction and intensity this commodity currency takes going forward will depend heavily on investors’ demand for return and relative safety along the way. For this reason, fundamental traders need to be ready for both scheduled and unscheduled event risk as conditions can change quickly.

Looking to the economic docket first; it is clear that there is the potential for substantial volatility following the round of notable market movers scheduled through the week. To find the real bead on risk appetite though requires a closer examination of the data. A significant lag on the Australian GDP release has actually helped to cement the positive sentiment that was generated after the government reported the economy averted a recession through the first quarter by growing 0.4 percent. However, this stall above the waterline is not a guarantee that the conditions are now starting to turn around. Momentum could have capsized the second quarter or the economy could merely be ahead of the curve to come to a pace of stagnate growth for an extended period like many of its counterparts are expected to experience. Currently, speculation seems to be pricing in a ‘V’-shaped recovery. This week’s data will help adjust expectations. One of the most overlooked factors in growth forecasting domestic consumption. The consumer base is the largest component of the Australian economy and without spending, expansion will be flimsy. The gauge for June and second quarter retail sales however suggests the Land Down Under is not suffering the same disconnect as many of its US, European and Asian counterparts. Forecasts call for a 1.3 percent pickup in sales through the three month period – which would be a fourth consecutive improvement. Employment on the other hand may undermine this trend. A third consecutive drop in payrolls would be the longest series of net declines since 2000. What’s more, a 6.0 percent unemployment rate would be a six year high.

The second source of potential growth for the economy will be through foreign demand. Australia produces a significant portion of the eastern hemispheres raw materials and is a key trade partner of China’s. With the Chinese government reporting an acceleration in its pace of expansion and dedicating funds to building infrastructure, demand for Aussie exports should be well supported. That is the theory at least. The trade deficit is expected to swell to A$800 million in its June reading. The details are key to this report’s contribution to growth forecasts rather than the headline number alone.

Economic growth is one of the primary fundamental drivers behind the currency market; but individual indicators are only offering fine adjustments to expectations and not the sort of significant shifts that spark volatility. The trigger for price action for this pair lies in its link to general risk appetite. For this reason, the RBA rate decision on Thursday holds considerable potential energy. The central bank is expected to hold the benchmark unchanged at 3.00 percent; but their commentary can make all the difference in the world. Just this past week, Governor Stevens suggested he was look for evidence of when it would be time to hike. If his language suggests a time frame has been laid out, it could charge the Aussie dollar whether broader sentiment was stagnate or soaring. - JK

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>