Fundamental Outlook for Australian Dollar: Neutral

- Australian Dollar gains as Employment data impresses
- View our monthly Australian Dollar/US Dollar Exchange Rate Forecast

The Australian Dollar finished the week a top performer among G10 currencies, bolstered by a noteworthy recovery in the US S&P 500 and broader risky asset classes. The sizeable advance was especially impressive given that the Aussie dollar was actually the worst-performing currency just a week ago. Its sharp recovery highlights the intensely indecisive and choppy price action out of financial markets—making short-term forecasts especially difficult.

Strong Australian Employment change numbers bolstered fundamental outlook for the currency and boosted expectations that the Reserve Bank of Australia would once again raise rates through the coming 12 months. Overnight Index Swaps nonetheless predict that the RBA may only change rates by a meager 26 basis points through that stretch—a substantial shift from the previously-aggressive calls for further monetary policy tightening. The moderation in interest rate expectations have broadly coincided with Australian Dollar weakness. The causal link between the two is by no means definite, but we would argue that future AUD strength may very well depend on whether the high-yielding currency will maintain its rate advantage versus major counterparts.

Traders will watch for any surprises from the upcoming release of the RBA’s Meeting Minutes from its June interest rate decision. Yet it may take a fairly substantial and unexpected shift to force any major moves in the domestic currency. Movements in the S&P 500 and broader financial market risk appetite will likely remain the most important Australian Dollar influence in the week ahead. The similarly dramatic recovery in the financial market risk barometer suggests that very short-term risks remain to the upside. Indeed, the S&P 500 recently broke above a noteworthy Fibonacci retracement resistance level and a multi-week downtrend channel. Stock market rallies could be just enough to force the AUDUSD above the key $0.8500 in the week ahead.

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