Over the past week the Australian Dollar has been subject to marked price swings in response to massive fluctuations in market sentiment. With Federal Reserve rate hike bets significantly reduced following a shocking non-farm payrolls report, however, the ‘Aussie’ (AUD) gained versus a number of its major peers as the week progressed.
AUD Exchange Rates Struggled against Damp Market Sentiment Last Week
Market sentiment has seen monumental shifts over the past week in response to several factors. These include changing expectations regarding the timing of a Federal Reserve cash rate increase, volatile global equity values, fluctuating commodity prices, ‘Brexit’ uncertainty and ongoing issues contributing to China’s economic slowdown.
As a risk-correlated asset, the Australian Dollar has seen significant price-swings. In addition, mixed results from domestic data reports have done little to divert volatility. Notable results include the disappointment from a slowdown in May’s manufacturing output and better-than-expected first-quarter growth on both an annual and monthly basis.
The Australian Dollar improved versus most of its peers as the week progressed, however, owing to speculation that the Fed would have no choice but to remain in ‘wait and see’ mode with regards to policy outlook. The ‘Aussie’ (AUD) dominated Pound Sterling for the week’s entirety, although that was mostly the result of Sterling weakness reflecting increased ‘Brexit’ jitters.
RBA Not Expected to Cut Rates Yet as Stephens Battles High-Priced Housing
On Monday the Australian Dollar traded narrowly versus most of its peers, with the exception of recording notable gains against Sterling, as market sentiment becomes neutral ahead of a key speech from Fed Chairwoman Janet Yellen.
The primary focus for those trading the ‘Aussie’ this week will be Tuesday’s Reserve Bank of Australia (RBA) interest rate decision. Governor Glenn Stevens finds himself between a rock and a hard place as the need to cut rates in order to support ‘Aussie’ overvaluation also contributes to a growing housing price bubble.
Most analysts do not expect the RBA to cut rates at this time, especially with the institution having eased to the record-low 1.75% recently. However, there is a general expectation that the high value of the ‘Aussie’ will prompt RBA policymakers to call for at least one further cut before the close of the year.
There is a chance that the Australian Dollar will continue to hold a position of strength against the British Pound irrespective of the RBA rate decision. With Sterling’s sensitivity to political developments causing heightened volatility, sentiment is likely to continue to reduce as we draw ever closer to the June 23rd EU referendum vote.
GBP/AUD Forecast to Hold Losses, USD/AUD Predicted to Fluctuate
As explained above, the Pound is likely to hold losses versus the ‘Aussie’ owing to mounting uncertainty surrounding the EU referendum. There will be a number of data releases with potential to provoke GBP/AUD changes, but ecostats are likely to take a backseat to political developments.
For those trading with the Pound, Wednesday’s Industrial Production, Manufacturing Production and NIESR Gross Domestic Product Estimate reports will be of most significance.
The USD/AUD exchange rate is more likely to see volatility in the face of ongoing uncertainty regarding the Fed’s policy outlook.
This evening’s speech from Janet Yellen should set the tone for the week in terms of the USD/AUD exchange rate. The RBA’s rate decision a few hours later could cause further changes, however.
Other notable publications likely to have an impact on the USD/AUD exchange rate will be Wednesday’s Foreign Direct Investments and Trade Balance data from China, and Friday’s US University of Michigan Consumer Confidence report.
Over the past week, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was trending within the range of 1.9551 to 2.0434.
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Summary of major upcoming data releases that we think may move the market.