Aussie Dollar Faces Perfect Storm of Domestic, External Pressure

Fundamental Forecast for the Australian DollarBearish

  • Aussie Dollar may fall on dovish RBA rhetoric, soft GDP data
  • Firm US jobs report may stoke Fed rate hike bets, sink Aussie
  • Where will AUD/USD trend this year? See our 2016 forecast!
  • Home-grown event risk looms large for the Australian Dollar in the week ahead as the RBA delivers a monetary policy announcement and fourth-quarter GDP figures cross the wires. External event risk is not to be dismissed however, with high-profile US and Chinese releases also on tap.

    Australian economic news-flow has notably softened relative to consensus forecasts since February’s RBA sit-down. While this is unlikely to trigger a cut this time around, it may inspire a dovish shift in the central bank’s rhetoric and weigh on the currency. As it stands, traders price in 43 basis points in easing over the coming 12 months, implying at least one rate cut and an 86 percent probability of two by this time next year.

    Weakness may be compounded if the GDP report falls in with the recent trend in data underperformance. Output is expected to grow 0.5 percent, marking a slowdown from the 0.9 percent gain in the three months through September.

    On the external front, February’s US Employment report takes top billing. Realized US economic data outcomes have markedly improved compared with expectations since the beginning of the month, hinting that analysts may be underestimating the economy’s vigor and opening the door for an upside surprise. Payrolls seen rising 190k, marking a significant improvement over January’s disappointing 151k gain (the smallest in four months).

    Wage inflation figures ought to be watched even closer than the headline figure however. Indeed, it is sluggish price growth that has bedeviled the Fed as it moves to cautiously scale back crisis-era stimulus, not the labor market. If average hourly earnings mirror recent upticks on US CPI and PCE price growth measures, the markets may be forced to reconsider 2016 interest rate hike probabilities.

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