Fundamental Forecast for Australian Dollar: Neutral

The Australian dollar finished the week roughly unchanged versus its US namesake, but the commodity-driven currency continues to trade near record-highs on similar strength in raw materials prices. Recent CFTC Commitment of Traders data shows that Non-Commercial traders—typically speculative in nature—are the most net-long the Australian Dollar in history. Such impressively one-sided sentiment makes it difficult to call for further rallies, and traders should keep an eye on the coming week’s key Reserve Bank of Australia and Producer Price Index inflation figures to drive AUD volatility.

The Australian dollar continues to benefit from the highest short-term interest rate of any G10 currency, and the coming week’s RBA commentary and PPI inflation numbers could drive further interest rate-driven moves for the antipodean currency. Overnight Index Swaps currently show expectations of 25 basis points in RBA interest rate increases in the coming 12 months. Said expectations pale in comparison to forecasts of as much as 100bps from the European Central Bank and 90bps from the Bank of Canada—presenting downside risk for the Australian currency. It may subsequently be important to watch whether the RBA or inflation figures can produce a meaningful shift in yield expectations.

RBA officials have shown little urgency in raising interest rates further and are likely to cite an exchange rate at record-highs as sufficient to contain price pressures despite healthy domestic growth. Producer Price Index Data is nonetheless expected to show that inflation rose notably in the first quarter. Significant surprises in either direction could force substantive volatility in Australian dollar pairs. Given that the AUD remains at record levels and leveraged futures positioning is at record extremes, we would argue that risks remain weighed to the downside. Of course, trying to pick a US Dollar bottom (and Australian Dollar top) has proven elusive, and we caution against placing aggressive bets on AUDUSD reversal amidst one-way price moves.

DailyFX provides forex news on the economic reports and political events that influence the forex market.