AUD USD - FUNDAMENTAL DRIVERSAUD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Ongoing issues with China’s economy remain a question mark for the AUD. As long as China’s potential for recovery remains uncertain, the path for the AUD remains the same. The RBA surprised this past week with a 25bsp hike, sparking some speculation that the bank could be finalizing their hiking cycle sooner than expected (STIR markets priced out close to 75bsp from the terminal rate after the decision). As always risk sensitivity needs to be kept in mind for the AUD, and that means Q3 earnings season needs to be kept on the radar this incoming week. The RBA meeting will also be in focus after the sold quarterly CPI print we had this past week.
POSSIBLE BULLISH SURPRISES
Data showing China’s growth outlook is improving or surprise announcement at the CCP congress that Covid-zero will end could provide upside for the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. Catalyst that triggers recovery in key export commodities (China stimulus, lifting covid restrictions, new infrastructure projects in China) should be supportive for the AUD. The RBA caught markets by surprise with their 25bsp hike this past week. If the bank surprises with a 50bsp due to the strong QQ CPI it would be supportive for the AUD.
POSSIBLE BEARISH SURPRISES
Data showing China’s growth outlook is deteriorating or strong affirmation that the covid-zero policy is here to stay could add additional pressure on the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Catalyst that triggers further weakness in key export commodities (additional China restrictions, demand destruction) could be negative for the AUD. The RBA caught markets by surprise with their 25bsp hike this past week. With some participants expecting a 50bsp hike after the QQ CPI, another 25bsp hike could pressure the AUD.
BIGGER PICTURE
The AUD’s outlook remains neutral but is largely dependent on China and whether key commodities like Iron Ore and Coal can stop their bleeding. Until the covid situation and property issues in China improves materially, and until commodities and China’s growth stabilizes, the AUD is best suited for short-term trades in line with strong short-term sentiment. For the week ahead the focus will be on the RBA where markets want to see whether the RBA will be swayed by solid QQ CPI to hike by 50bsp. Our baseline expectation is that the bank will stick to a 25bsp, which could see downside for the AUD since a few market participants have changed their view to expect a 50bsp from the bank.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.89%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Our expectation for a softer USD this past week played to our advantage with a punchy move lower in the Dollar. The week ahead is filled with lots of US economic data and the FOMC policy decision which will all be important drivers for the USD.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. We have a very excited economic calendar for the US in the week ahead, with lots of important economic data and the FOMC meeting. For the econ data our expectation is for a cyclical reaction where very good data is expected to support the USD and very bad data expected to pressure the USD. As for the Fed, the main focus will be on whether the FOMC confirms a downshift in the pace and size of hikes.
