Australian Dollar Looks to Fed Policy Bets, Chinese PMI for Guidance

Fundamental Forecast for Australian Dollar: Neutral

• Australian Dollar Looks to Evolving Fed Policy Bets for Direction Cues
• Soft Chinese Manufacturing PMI May Limit Scope for Aussie Recovery
• Identify Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar mounted a spirited recovery last week, rising 1.8 percent against its US counterpart to record the best performance in a month. Fading Federal Reserve rate hike expectations appear to be behind the Aussie’s rebound, with the currency rising from a multi-year low alongside moderation in priced-in expectations for where the Fed funds rate will be by the end of the year (as telegraphed in futures contracts).

A near-empty domestic economic calendar is likely to keep external factors at the forefront in the week ahead. Last week’s FOMC policy announcement and subsequent clarifying remarks from Fed officials (most notably from Dennis Lockhart, the President of the central bank’s Atlanta branch) suggest the decision on rates “liftoff” will now be made on a meeting-to-meeting basis. This makes for a data-sensitive environment in the near term.

February’s US CPI figures take top billing. The core year-on-year inflation rate is expected to rise to 1.7 percent, marking a three-month high. US price-growth data has increasingly underperformed relative to consensus forecasts since mid-2014 however, suggesting analysts’ models have tended to overstate inflation and opening the door for a downside surprise. Such an outcome may further erode Fed tightening bets, offering the Aussie a further boost.

A wealth of scheduled commentary from key Fed officials will likewise inform investors’ outlook. Remarks from FOMC committee members Williams, Evans and Lockhart as well as Fed Vice Chair Fischer and Chair Yellen are all due to cross the wires. Needless to say, the markets will be keen to get further clarification on the prevailing timeline for the onset of stimulus withdrawal. Rhetoric pointing to cooling conviction on a mid-year rate hike is likely to help the Aussie recovery continue.

HSBC’s Chinese Manufacturing PMI print is a wild card. The release is expected to show factory-sector activity slowed in March, hitting a two-month low. The Aussie has tracked eroding 2015-16 Chinese GDP forecasts downward since mid-2013. This warns that signs of sluggishness in the Oceanic country’s top export market may push the RBA policy outlook deeper into dovish territory and weigh on the exchange rate. Markets now price in 50bps in easing over the coming 12 months.