Australian Dollar May Wilt with Dow Jones, S&P 500 Looking Wobbly

Australian Dollar Fundamental Forecast: Bearish

  • Australian Dollar may fall as focus turns to external risks
  • Traders may look past RBA minutes, Philip Lowe speech
  • All eyes on rising US coronavirus cases, earnings season

The growth-linked Australian Dollar heads into next week anchored to how fundamental developments impact equities such as the Dow Jones and S&P 500. There will be a couple of domestic news flow to keep an eye on, such as the Reserve Bank of Australia meeting minutes on Wednesday. This will be followed by a speech from RBA Governor Philip Lowe.

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The central bank appears to be in standstill mode on monetary policy. The board noted that it will not increase the cash rate target until progress is being made towards full employment and inflation is on a path to reaching sustainably between 2-3%. With that in mind, this will likely leave Aussie pairs such as AUD/USD and AUD/JPY focusing on external news flow.

Australian Dollar External Risks: Coronavirus Cases, US Earnings Season

The aggressive recovery in global equities, particularly those from the US, has been a boon for the Aussie since late March. Lately, AUD/USD has been able to sustain highs despite rising cases of the coronavirus in Australia and in the United States. The latter has seen cases swell as deaths climbed 1,413 this past Wednesday, the most in almost 2 months.

Economists’ estimates for 2021 global GDP have remained unchanged thus far (see chart below). The Australian Dollar’s rise since March has been accompanied by hopes of a swift recovery in GDP. Thus far, rising cases have not yet materially altered the outlook for future growth. This could be due to investors seeing recent moves from the US to contain the outbreak as insufficient to materially throw off estimates.

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This could change if government officials reinstate lockdowns, pouring cold water on swift economic recovery bets. Meanwhile earnings from Netflix, a key US tech giant, disappointed expectations, sending its stock down about 10% in after-hours trade. All eyes turn to Microsoft’s report in the coming week as tech companies defend their relatively elevated valuations, won amid speculation that lockdowns will boost demand.

The economic docket from the US is relatively light ahead, leaving less room for what has been consistently better-than-expected data outcomes to boost sentiment and the Aussie. In the background, the Federal Reserve’s balance sheet continues to hold around current levels, leaving other forces to do the heavy lifting for stocks. On balance, this points to a bearish outlook for the Australian Dollar.

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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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