Australian Dollar to Look Past G20 on US Budget Woes

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AUDUSD=X0.9327-0.0005

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Fundamental Forecast for Australian Dollar: Bearish

The Australian Dollar suffered heavy losses last week in the wake of the RBA monetary policy announcement. The central bank kept the benchmark lending rate unchanged at 3 percent as expected but the statement released following the sit-down clearly opened the door for further easing in the months ahead. Economic data released in the aftermath of the rate decision helped to reinforce that message: retail sales unexpectedly fell while January’s employment data revealed a worrying slump in full-time hiring and a decrease in the jobless rate that owed more to a shrinking labor force than jobs growth.

The domestic economic calendar thins out in the week ahead, opening the door for larger market themes to take the reins. AUDUSD continues to show a significant correlation to our in-house risk-reward gauge, suggesting the influence of sentiment trends remains an important consideration. The newswires seem likely to be preoccupied with the G20 summit at the end of the week, but this seems misguided. Although policymakers will almost certainly offer plenty of lip-service to the importance of exchange rate flexibility, nothing concrete is likely to emerge (as usual). Indeed, with more countries adopting a relatively activist currency policy, singling out individual offenders increasingly sounds like a case of the pot calling the kettle round and hot.

On balance, US economic data may prove far more interesting as speculation surrounding the looming “sequester” spending cuts heats up. While another last-minute deal to dull the impact similar to the one done on tax hikes seems likely, some amount of additional austerity is almost certainly in the cards. With that in mind, US data is likely to be interpreted in the context of the economy’s ability to digest fiscal retrenchment without snuffing out the already wobbling recovery, a scenario with clearly negative implications for global growth trends at large. Consumer confidence and retail sales numbers are on tap this time around. US news-flow has proven to be broadly disappointing relative to expectations over recent weeks, with more of the same threatening to unleash risk aversion and weigh on the Aussie.

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