Currencies | Apr 04 2011
– AUD put down a strong performance last week as risk appetite returned to financial markets
– FXCM believes last week's trend could continue in the week ahead
By Christopher Vecchio
Fundamental Forecast for Australian Dollar: Bullish
The Australian Dollar had another strong week against the Greenback, gaining 1.2 percent as investors bought higher-yielding assets on the notion that economic growth is continuing to improve. In fact, it was U.S. nonfarm payrolls data that helped boost the antipodean currency, as firming footing for the world’s largest economy provided a boost to risk appetite, sending traders into the commodity currencies on Friday.
The week ahead, should risk sentiment continue to trend higher, could continue to send the AUD/USD pair to new highs. A few key events are on the docket for the Oceania nation will guide the pair in light of little significant data out of the U.S. scheduled. The AiG Performance of Service index, a gauge of sales, new orders, and employment, among other things, has held below 50.0, signaling contraction, for four consecutive months, though the trend could be bucked as investors have poured money into Aussie-based assets over the past few weeks, as evidenced by AUD/USD pair strength. In what is perhaps the most important event of the week on the Aussie side of the pair is the release of the trade balance report for February, though to no real surprise, is forecasted to show a narrowing surplus as the antipodean currency has strengthened since the start of the year.
Also to be noted is the Reserve Bank of Australia, which comes out on Tuesday.Inflation remains below 3.0 percent, and given the RBA’s high interest rate, it actually dropped in the fourth quarter of 2010. Growth expectations remain modest for the Australian economy, having grown at 2.7 percent in the fourth quarter at an annualized rate. Hence, there exists little reason for any shift in policy by the central bank. The markets, in light of this economic data, expect the overnight rate to remain at 4.75 percent until December, when the implied rate is forecasted to rise to 4.84 percent – a fairly insignificant 9.0 basis points. Should this hold true, coupled with recent rising rate hike expectations by the Federal Reserve, the run higher by the AUD/USD pair could be cut short, though that remains to be seen as increasing risk appetite continues to support the pair.
The views expressed are not FNArena's (see our disclaimer).
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