What’s ahead for AUD/USD?

Its seems the moves in the currency market have been driven by the USD and comments from Bill Dudley and Stanley Fischer, two key members on the Federal Reserve.

Source: Bloomberg

It seems both members are seeing the positive ramifications of the falling oil price and feel the US economy will be in good shape next year. New York Fed president Bill Dudley detailed that expectations of a ‘mid-2015 interest-rate increase seem reasonable to me’. This view seems in-line with many economists; however the money markets are more sanguine about rates and feel November may be a more fitting time. The four basis-point move higher in the US two-year bond shows just how hawkish traders believed the comments to be.

AUD/USD initially rallied to $0.8543 after the RBA statement, but gave up much of this goodwill with the USD pushing higher. USD/JPY has broken out of its recent consolidation and looks like it could test ¥120.00 in the short term.

Yesterday’s RBA statement hardly expressed an urgency to ease anytime soon (hence the initial AUD strength) and, with the swaps market pricing in an 84% chance of a cut over the coming 12 months, it seems some traders were positioned for a more dovish statement. Deutsche Bank even put out a note yesterday saying interest rates would be cut by 50 basis points in 2015, which seems very aggressive.

The statement itself was similar in wording to the November statement, although there have been some subtle changes. Notably, the passage on the exchange rate is different, stating ‘a lower exchange rate is needed to achieve balanced growth in the economy.’ Here the word ‘needed’ seems punchier than before. Still, with building approvals and trade data looking strong, and the recent capital expenditure data also showing capital plans are robust, it seems unlikely the Reserve Bank of Australia (RBA) are going to ease anytime soon.

The swaps market is pricing in a 56% chance of a cut now and, while I feel the markets should have a slight easing bias, the prospect of easing from the RBA seems low at this stage.

Today’s Q3 GDP read (at 11:30 AEDT) is expected to print 0.7% on the quarter (the economists’ range is +0.9% to +0.4%) and 3.1% on an annualised basis. There are some upside risks here, given the recent net export data. In the US tonight we get the ADP private payrolls report (expected to print 222,000 jobs), while importantly the ISM services index is expected grow at a slightly faster rate of 57.5. Watch the two-year US bond as a fall in prices (rise in yields) would be the key driver for AUD/USD.

Technically, there seems to be quite a bit of focus on the weekly chart. AUD/USD has tested the lower bounds of the multi-year channel and is finding good buying support (as you can see from the chart). The daily chart is also bearish and rallies are being used as good selling opportunities.

Click to enlarge

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.