Can Positive Fundamentals Help Aussie Reverse Downtrend?

  December 09th, 2013 at 12:34, Vladimir Vyun

David Unaipon on Australian 50-dollar billThe Australian dollar was demonstrating weakness lately, though it was able to pare losses against the US dollar and the Japanese yen by the end of the last week. Does this mean that the currency is ready to reverse the downtrend? Not necessarily.

The previous week was mixed in terms of economic reports. The Reserve Bank of Australia refrained from an interest rate cut, but signaled that it is still unhappy with the current exchange rate of the currency, which is too high, and lower borrowing costs remain a definite possibility.

This week should be fairly important for the Aussie as several rather significant reports will be released. The week starts with jobs advertisement data from Australia and New Zealand Banking Group. Later, two important sentiment indicators will be released: National Australia Bank business confidence index and Westpac-Melbourne Institute Consumer Sentiment Index. Economists believe that all these reports should be positive. And the major release is scheduled on Friday: the employment data. Analysts predict that the report will show solid growth by 10,300, but the unemployment rate is expected to tick up by 0.1 percentage point to 5.8 percent. If employment data is indeed good, it should reduce bets on a rate cut from the RBA.

Outside of Australia, China (the major Australia’s trading partner) will also release several key reports. The trade balance was already released and it positively surprised market participants, showing that the surplus widened, not shrank as was expected. As for other indicators, the Consumer Price Index and industrial production should also provide good readings, at least according to analysts’ promises.

So, fundamentally the Australian currency has nice support. Does this mean that traders should be long on the Aussie? Things on the Forex market are not that easy and specialists are reluctant to recommend buying the currency. Australian economic growth was perceived to be relatively fragile and few good indicators will not easily change this view. The central bank still leans in favor of lower interest rates (a stark contrast to another South Pacific central bank, the Reserve Bank of New Zealand, which plans to raise its rates) and this outlook pressed the Aussie to the downside. Additionally, positive data from the United States increases chances for quantitative easing tapering from the US Federal Reserve. It is true that nonfarm payrolls had a surprising impact on the market last week, spurring risk appetite instead of risk aversion. Yet this does not mean that the market sentiment cannot change over the week as the date of Fed’s December policy meeting nears.

As a result of such considerations, DailyFx is neutral on the Australian currency. It thinks that seasonal factors may be in favor on the Aussie, but it does not warrant long positions. Forex Crunch is in fact bearish on the currency, arguing that the threat from both the US and the Australian central banks will drag the Aussie down.

If you have any questions, comments or opinions regarding the Australian Dollar, feel free to post them using the commentary form below.

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