At the end of the week the Australian Dollar (AUD) was bolstered by improved risk appetite as the US Dollar (USD) was weighed down by disappointing domestic data.
The appeal of the Australian Dollar (AUD) was largely improved on Thursday by the revelation that the domestic unemployment rate had dropped back from 5.8% to 5.7% in March. Stronger levels of employment suggested that the domestic economy was not being overly impacted by negative global headwinds and commodity weakness. This offered a rather more encouraging picture of the Australian economy than investors had anticipated, boosting the ‘Aussie’ as it raised hopes that the Reserve Bank of Australia (RBA) will leave interest rates on hold for longer. As researchers at BNZ noted:
‘The RBA has explicitly linked the case for further easing to the employment data. With the labour market continuing the improvement seen in 2015, and with inflation expectations well anchored, NAB continues to see the RBA on hold in 2016.’
Confidence in the US Dollar (USD), meanwhile, was dented as the latest US Consumer Price Index report proved disappointing. Rather than rising to 1.1% inflation was found to have retreated to 0.9% on the year in March, undermining the case for an imminent interest rate hike from the Fed. With inflationary pressure failing to increase it seems likely that the Federal Open Market Committee (FOMC) will opt to maintain a more cautious approach to monetary policy, a prospect that boosted the Australian Dollar to US Dollar (AUD/USD) exchange rate sharply.
The ‘Aussie’ extended its gains further on Friday in response to the latest raft of Chinese data, which prompted an increase in market risk appetite. In the first quarter of 2016 China’s economy grew by 6.7%, which was in fact its slowest rate of growth since early 2009. While the world’s second largest economy is still in a clear state of slowdown markets were nevertheless optimistic that recent stronger data could mean that the downturn is bottoming out. With domestic retail sales and industrial production both proving stronger than anticipated, the reaction to the data was decidedly bullish, shoring up higher-risk assets as commodity prices rallied.
Investors were disappointed overnight to find that the University of Michigan Confidence Index had fallen significantly short of expectations. Rather than rising as forecast to 92 the measure instead slipped back to 89.7, suggesting that American consumers were decidedly less optimistic in April. Another indication of economy weakness, this prompted the US Dollar to soften further, boosting the AUD/USD exchange rate heading into the weekend.
Next week the AUD/USD exchange rate is likely to take some cues from the RBA’s April meeting minutes, which could offer fresh support to the antipodean currency if policymakers are shown to be sufficiently relaxed about monetary policy. Any suggestions of greater easing bias, however, could see the ‘Aussie’ soften as this would fuel the possibility of a nearer term interest rate cut. Similarly, a speech from Governor Glenn Stevens could prompt some re-evaluation of the Australian Dollar on Tuesday.
Commentary from members of the FOMC is expected to drive US Dollar movement at the start of the new week, with more signs of hawkishness likely to give the ‘Greenback’ a renewed boost against rivals. If the latest US housing data also proves bullish the AUD/USD exchange rate is predicted to return to a downtrend.
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