AUDUSD [2 HR – 08/22/2014] Chart created using FXCM Marketscope
Fundamental Forecast for Australian Dollar: Neutral
- AUD/USD Consolidates As Dovish Policy Bets Diminish Amidst Return To Yield
- Void of Major Regional Data To Leave ‘Period of Stability’ Rates Scenario Intact
- Carry Demand May Support AUD As Traders Look Past Geopolitical Tensions
The Australian Dollar is heading for another relatively flat finish to the week ahead of the Jackson Hole Symposium. The currency was afforded some support as RBA policy expectations shifted away from the more dovish end of the spectrum. This came on the back of a status-quo set of RBA Meeting Minutes and a relatively optimistic set of comments from Governor Stevens on the domestic economy. Additionally, a broader return to high-yielding instruments helped offset some of the negative cues provided by a deterioration in Chinese economic data.
Looking ahead, RBA policy bets as well as general market risk appetite remain the dominant themes to monitor for the Aussie. On the policy front; a void of local economic data is on the calendar heading into the end of the month. This is likely to leave the ‘period of stability’ baseline scenario for rates intact. Which in turn could keep the currency supported via its yield spread over its major counterparts.
Of course, the appeal of the currency’s interest rate advantage is intrinsically linked to broader risk sentiment. Implied volatility remains near multi-year lows despite a small recovery for the gauge over the past month. This suggests traders are pricing in a relatively small probability of major market swings in the near-term. Such an environment raises the attractiveness of carry trades and bodes well for the Aussie.
Further, the threat posed to investor optimism by ongoing geopolitical turmoil appears to have diminished in recent weeks. Storm clouds continue to loom over Eastern Europe and the Middle East. Yet traders seem to have become desensitized to the latest flare-ups. This suggests it would likely take a material escalation in the regional turmoil to threaten the resilience of the Australian Dollar.
Given the lack of major local events the main risks of the AUD/USD breaking from its recent range are likely to stem from its US counterpart. Refer to the US Dollar outlook for insights into how the USD side of the equation may influence the pair.
Written by David de Ferranti, Currency Analyst, DailyFX
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