- AUD/USD finishes flat despite a bumpy week on RBA minutes, China data, and geopolitical shocks
- CPI figures and Stevens’ speech unlikely to shift expectations for a “period of stability” for rates
- If geopolitical tensions fail to intensify, traders could return to the Aussie for its yield appeal
The Australian Dollar’s consolidation continued over the most recent week
with AUD/USD remaining within its narrow range between 0.9210 and
0.9440. A status-quo set of Minutes from the RBA and positive Chinese
second quarter growth figures failed to inspire the Aussie bulls. While a
sell-off on heightened geopolitical tensions proved to be short-lived,
with the currency bouncing back during Friday’s trading. Over the week
ahead, two key themes are likely to continue to offer the Aussie
guidance; policy expectations and risk appetite.
On the risk-appetite front; geopolitical turmoil carries the potential to put pressure on the risk-sensitive currencies
like the Aussie. There is considerable uncertainty over whether the
flare-up between Israel and Hamas, as well as tensions in Eastern Europe
could escalate, which could leave traders hesitant to move back to the
Aussie. Investors’ reactions to the latest developments suggests that
the market is highly sensitive to outside shocks at present. If either
situation were to intensify, it could lead to an unwinding of AUD carry
trade positions built up over recent months.
However, we have witnessed several of these geopolitical shocks this
year, which have ultimately failed to leave a lasting impact on
sentiment. When the dust settles from the latest flare-up traders could
again be tempted to return to the Aussie for its yield appeal.
Next week’s domestic CPI data and speeches by RBA officials
could feed the policy expectations theme. A surprise second quarter
inflation reading may see a knee-jerk reaction from the currency,
however given a shift in the rate outlook remains unlikely at this
stage, follow-through could prove limited.
Similarly, another attempt at jawboning the Aussie lower from
Stevens may fail to leave a lasting impact on the unit. In recent
addresses the RBA Governor has simply been delivering the central bank’s
view that the currency is overvalued, and at this stage remains
unwilling to take action such as intervention to put pressure on the
AUD.
