The AUD has been in demand for most of this year. A combination of improving global risk sentiment on the back of several central banks more dovish stance and improving domestic conditions to the benefit of RBA monetary policy expectations have been driving this year’s developments. Stabilising commodity prices have helped too.
With speculative oriented investors now long the currency, there is limited position squaring-related upside risk left. If anything this suggests that fresh buying is needed to drive the AUD sustainably higher. For that purpose further improving commodity price developments, rising risk appetite and/or increasing RBA rate expectations may be required. This is especially true as limited room of further falling Fed monetary policy expectations may reduce USD downside risks from the current levels.
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With global growth momentum still capped, major central banks are unlikely to become more aggressive on monetary policy anytime soon, however it cannot be excluded that risk sentiment may turn more unstable in the weeks to come.
Elsewhere, the RBA is unlikely to make a case of a less dovish policy stance. The central bank will meet next week and chances that Stevens may consider a more cautious rhetoric tone cannot be excluded with respect to the currency.
As a result of the above outlined conditions we believe that the AUD faces downside correction risk. In the short-term we forecast a return closer to 0.70.