Fundamental Forecast for the Australian Dollar: Neutral

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The Australian Dollar enters a period of relative quiet after back-to-back weeks of intense event risk. Prices jumped to the highest level in close to nine months last week in the wake of the FOMC monetary policy announcement, which saw policymakers deliver a more dovish tone than markets anticipated. Chair Janet Yellen and company highlighted a precarious global environment and trimmed their 2016 rate hike outlook to just 50bps, down from 100bps estimated in December.

Looking ahead, a lull in high-profile event risk on the domestic and the external fronts offers prices the opportunity to consolidate recent volatility. The upcoming week will also be shortened by closures for the Good Friday holiday across most major exchanges. This is likely to bring ebbing liquidity in the second part of the week. While thin trading conditions may make for even more restrained activity, it could likewise amplify kneejerk price swings in the event that an unexpected headline of significance crosses the wires. With that in mind, traders may look to trim exposure ahead of the drain in the first part of the week. This could bring an unwinding of long-AUD bets, driving a retracement downward.

A handful of US activity indicators are due to cross the wires. The Durable Goods Orders report takes top billing, with readings on existing and new Home Sales also on tap. The preliminary set of March Eurozone PMIs is also set for release. Taken together, the outcomes may inform the outlook on global economic growth and thereby influence risk appetite trends. Soft results may feed into concerns about slowing growth and undermine sentiment, weighing on the cycle-sensitive Aussie. Indeed, the correlation between the currency and the S&P 500 stock index – a benchmark for market-wide risk trends – remains elevated at 0.92 on rolling 20-day studies. Alternatively, upbeat outcomes may yield the opposite dynamic.