Fundamental Forecast for Australian Dollar: Bearish

The Australian dollar ended the week lower by nearly 1.2% against the greenback as a commodities rout accompanied by a broad based risk sell-off weighed on higher-yielding, growth backed assets. The aussie was further hit by a disappointing employment report that showed the continent-nation lost 22K jobs in the month of April, missing calls for a gain of 17K. The news had traders discounting rate-hike expectations from the RBA, with Credit Suisse overnight swaps now factoring only an 18% chance of a hike at the next central bank meeting. Markets continue however to price in a 33 basis point hike for the next twelve months. The key economic data to watch for next week will the RBA minutes when investors get a closer look at the central bank’s outlook for interest rates.

Friday’s price action saw the aussie test key support t at the 1.0560 level. A break below would see further losses of the AUD/USD pair, noting subsequent floors at the 38.2% Fibonacci retracement taken from the advance off the 2011 lows at 1.0510, and 1.0450. Topside resistance is eyed at 1.0680 followed by the 23.6% extension at the 1.0700-handle and 1.0770.

Looking ahead, the aussie will be subject to swings in risk sentiment as fears over sovereign debt default in Europe and global inflation concerns keep investors wary of risk assets. Adding to the worries are concerns over a slowdown in China after the central bank raised reserve requirement ratio for the fifth time this year in an effort to address rising inflation. Although our contrarian Speculative Sentiment index continues to see traders net short the aussie, sentiment has been waning with the index climbing from -5 to -1.4. The move suggests traders may be close to flipping their bias to the topside, which would support our interim bearish outlook on the pair.

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