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Australian Dollar Weekly Outlook: Dropping While Risk Aversion Prevails, Carry Trade Follows S&P 500 Lower. Due For Bounce?

 

 

AUD/USD DAILY AVAFX CHART 21 JAN 22

Summary

Australian Dollar Bias: Neutral

- Events: Sun-Producer Price Index y/y, Tues- Westpac Leading Index, Consumer Prices y/y, Wed- Conference Board Leading Index, Thurs- Private Sector Credit m/m

- Australian dollar is THE highest yielding and thus most popular long play for risk-trade currency, likely to suffer most if risk aversion persists

- Bullish Australian Vehicle Sales nonetheless boosts outlook for domestic interest rates

- Australian Dollar technical outlook somewhat mixed and at odds with USD-bullish forecasts

Analysis

In a week of risk aversion, the Australian Dollar was expectedly among the worst-performing currencies through a difficult week for the US S&P 500 and other major indices, falling considerably. A relatively strong week of second-tier economic data initially led to noteworthy Aussie Dollar strength. Yet early signs of a larger recovery in the safe-haven US Dollar and considerable weakness in risk barometers overrode local news, as it tends to do. CFTC Commitment of Traders data shows speculators at their most net-long Australian Dollars since the AUD/USD topped in 2008 leaving the Australian Dollar vulnerable to a serious selloff should there be a prolonged period of risk aversion, courtesy of any number of possible sources (see: Global Stocks, Forex, Commodities Weekly Outlook 1/25 – 1/29: Key Events & Implications).

Events

 

As always, local events are likely to be overwhelmed by larger market drivers discussed in the above Weekly Outlook. As the reigning high yielding currency, the Aussie flies highest good times, falls the hardest in bad, as carry trades unwind. That said, there are some local events to watch.

The upcoming Australian Consumer Price Index report will likely prove the highlight for Australian Dollar trade in the week ahead, while traders may likewise do well to monitor results from US Federal Reserve and Reserve Bank of New Zealand interest rate announcements. Any noteworthy shifts in rhetoric from the US FOMC could easily force moves across financial markets. Interest rate traders are also pricing in a miniscule 5 percent chance that the RBNZ will raise interest rates by 25 basis points, and any especially large surprises could force sympathetic moves for the Australian Dollar.

Reserve Bank of Australia watchers will await upcoming Q4 CPI figures. Consensus estimates predict that prices rose 0.4 percent through the period and 2.0 percent on a year-over-year basis. Given buoyant employment data and other signs of economic health, we would expect that inflation risks remain to the upside ahead of the release. Overnight index swaps continue to price in RBA rate hikes through the next 12 months, but considerable uncertainty surrounding the timing of the next interest rate hike will make upcoming CPI data especially significant. Given that the Aussie is due for a bounce at some point, watch for considerable Australian Dollar strength on an upside surprise, while a noteworthy disappointment could force even sharper AUD weakness.

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