Australian Dollar at Risk of a Surprise RBA Rate Cut

Fundamental Forecast for Australian Dollar: Bearish

• Australian Dollar Tests Key Trend Line Support vs. USD
• Speculative Sentiment Points to Australian Dollar Losses

The spotlight is on the Reserve Bank of Australia in the week ahead as policymakers gather for their first rate-setting meeting in two months. Economists' forecasts and investors' priced-in expectations suggest Governor Glenn Stevens and company will hold the benchmark lending rate at 3 percent this time around. An outcome in line with expectations would shift the focus to the policy statement for guidance on where the central bank intends to steer in the months ahead. The possibility of a surprise cut seems plausible however.

Although the international landscape has somewhat improved since December's rate decision, Australia's domestic profile seems to have suffered. Broadly, data from Citigroup suggests that economic news-flow has noticeably deteriorated since the start of the year, with performance metrics increasingly lagging behind expectations. Most worryingly, PMI data points toward accelerating contraction across the industry spectrum and on key activity gauges including output, employment and exports. Inflation has picked up a bit but the RBA has long argued that this reflects the residual impact of the carbon tax rather than anything worrisome, meaning it would not necessarily preclude further easing.

While December's rate cut was widely expected, another reduction this time around would catch the markets off-guard and is likely to weigh heavily on the Australian Dollar. A relatively dovish statement may likewise trigger weakness if it reboots speculation about additional easing down the road. A re-hashing of the status quo would offer little in terms of directional volatility, making for a data-dependent environment and shifting the focus to Retail Sales and Employment data due to cross the wires in the second half of the week. Receipts are expected to post a shallow recovery but the 0.3 percent increase penciled in by economists would fall broadly in line with the trend average while the jobless rate is seen ticking higher to 5.5 percent.