Aussie Dollar Rally: Here's What To Watch This Week

The Australian Dollar is up about 1 full cent on Friday’s close after the news hit the market yesterday morning that Larry Summers had pulled out of the running for the Fed Chairman’s position.

While the general US dollar weakness and stock market bullishness that resulted from this news may not be good for Summer’s ego it has certainly been very good for the Aussie dollar bulls, many of whom were getting a little worried about the RBA minutes today completely derailing their hopes for higher levels.

The CBA has remained bullish however and wrote in a note to clients yesterday:

AUD surged over 1.5% this morning following the news about Summers…We expect AUD to end the week higher than Friday’s close though it is likely to be a volatile week. We expect AUD to be mainly driven by the USD side of the equation, particularly in the lead up to and after the FOMC’s policy meeting. Ultimately, we expect AUD to be stronger this week because we expect the Fed to be relatively dovish and the USD to be heavy. However, Tuesday’s RBA minutes may lead to some AUD weakness mid week in the lead up to the FOMC meeting if an easing bias is reinserted. This was the pattern observed in August, when an easing bias was re inserted in the minutes after being left out of the post meeting statement.

Translating all that into non-trader/strategist speak what they mean is: AUD goes up but RBA minutes are a risk. However, expect the Fed to be dovish about the path of interest rates so the AUD will go up by week’s end after dropping tomorrow.

The key for the moment and the next few cents though is that the Aussie has so far been unable to break and hold above the key 0.9350 region three times in the past week and twice in the past 24 hours.

The Aussie is back at 0.9335 having made a high of 0.9369 in Asian trade and then 0.9387 in Europe which highlights the risks traders see in the RBA minutes to be released this morning and a retention of the easing bias. Equally though even with this concern about the RBA the enduring worries over emerging markets, the BRICs and the potential impact of the Taper it is clear that the bulls are gradually gaining ground.

Ray Attrill, NAB’s co-Head of Currency Strategy told Business Insider:

We would still like to see AUD/USD closing above 0.9350 before formally suggesting that we are likely to push up above 95 cents near term.

Confirmation the RBA retains a soft easing bias, which is what we expect to read on Tuesday, should soften the AUD a little but risks out of the Fed are still skewed towards a further weakening in the US dollar even assuming we get an initial $10bn QE taper announcement.

The Westpac Global strategy team is equally cautious in their expectation of a rally in the Aussie, in a note to clients yesterday they said:

the US should be key on the week, with pursuit of the diplomatic path on Syria providing background support and the FOMC decision likely to be cautious enough to leave USD on the defensive, with AUD to benefit more than most. Scope for low 0.94s initially, potentially 0.9515 Fibonacci retracement by late Sep. Three month view still lower.

With market positioning still skewed toward a lower Aussie dollar and even somewhat bullish expectations extremely tentative maybe the Aussie dollar just might surprise with a topside break.

Importers and the RBA will take note.

Elswhere, David Uren has an interesting take in The Australian on the potential impact of the strengthening Australian dollar on the economic outlook.

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