Second Quarter Inflation Data, Europe to Guide Australian Dollar
Fundamental Forecast for Australian Dollar: Neutral/Bearish
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The Australian Dollar was the best performing major currency on the week, refusing to succumb to the risk-averse trends that took hold Friday and still managed to post a very solid 1.46 percent gain against the US Dollar over the past five days. The Australian Dollar would have been stronger but for Friday’s performance, in which the highest yielding major currency covered by DailyFX depreciated by 0.47 percent. While the bullish data trend for the Aussie has flattened out over the past week or so – especially in light of the disappointing Chinese GDP print in the week prior, as well as recent labor market data and the Reserve Bank of Australia’s July meeting Minutes – the Aussie continues find flows as global policymakers weigh the merits of more easing; the expectation that more quantitative easing will take place, be it from the European Central Bank or the Federal Reserve, has helped keep the Aussie well-bid during times of risk-aversion in recent days.
As we assess the fundamental outlook for the coming week for the Australian Dollar, there’s a number of factors influencing the high beta currency: the improving Australian growth picture; the deteriorating Chinese growth picture; and the liquidity strain on global financial markets onset by the European sovereign debt crisis. In a way, over the coming week, there will be a slight peppering of each of these influences into the fundamental sphere that will drive the Australian Dollar. And, considering these influences, we believe it is best to take a neutral perspective on the Aussie going forward, with a slight bias to the downside.
On Monday, the second quarter Producer Price Index readings will be released, and they will show a mixed picture at best. On a quarterly-basis, price pressures should have increased from -0.3% to +0.3%, no doubt influenced by the massive liquidity injections that cycled into the global financial markets in the beginning part of the year. While that would normally prove bullish for the Australian Dollar, the year-over-year estimates, which come in at +1.0% from +1.4%, should dampen any rate expectations and thus should nullify any bullish impact the q/q figures should have.
On Wednesday, the most important release for the Australian Dollar is due, when the second quarter Consumer Price Index will be released. Similar to the PPI released two days earlier, the CPI should show that price pressures increased in the near-term (q/q) but subsided over the longer-term (y/y). According to a Bloomberg News survey, the quarterly figure should show inflation of +0.6% from +0.1% while the yearly figure should show inflation of +1.3% from +1.6%. This too will have an impact on the Aussie; and in conjunction with the PPI print, we believe that higher near-term price pressures could lead to a quick Aussie rally, the declining longer-term (y/y) figures will ultimately weigh on the high beta currency.
Given the neutral tone of data out of Australia, we turn to China and Europe to help construct our forecast, which is neutral but skewed to the downside. China has various PMI readings due – both manufacturing and services from the government and private sectors – and we expect these readings to indicate slowed growth or even contractionary conditions in China. When taking Europe into consideration – which was absolutely mauled on Friday following the formal announcement of the Spanish bailout, we expect that a risk-averse environment could be taking shape rather quickly, especially at the beginning of the week next week. As such, we find that the exogenous pressures on the Australian Dollar, which should cultivate a more cautious investing environment, will ultimately deter market participants from heading into the Australian Dollar; and when combined with the overbought technical conditions evident on shorter-term charts, the week ahead looks ripe for some consolidation if not some downside price action in Aussie-based pairs. –CV