As we predicted last month, it hasn't been a happy start to the year for the Australian dollar. The Aussie plunged to a five-and-a-half year low on Wednesday before rebounding on Friday, but the outlook isn't strong in the short term.
Wednesday's low of 0.8035 was countered by Friday night's peak of 0.8207, keeping the Aussie comfortably above the psychological US80c level. It opened a fraction stronger still on Monday morning before again falling well below US82c in overnight trade.
But there are obstacles ahead to further upside. The first hurdle will be trade balance numbers from China. The second hurdle is Thursday's employment data. Economists' consensus on these appears conservative: just 5,300 new jobs, the lowest expected read in three months. That's a slight misalignment with what has been a solid data set over the past four weeks.
As a result the short-term outlook is neutral, now sighting higher lows.
US jobs data not as good as it appears
Despite the US posting its 11th consecutive month of employment gains in excess of 200,000, with the unemployment number now at 5.6 per cent, the net effect was greenback negative.
Looking past the apparently positive headline result, labour force participation is actually now at its lowest level since December 1977, and wage growth suffered its largest decline since 2006. The quality of employment gains and average hourly earnings are all being drawn into the mix.
US inflation is also in focus in this week. US headline inflation was at 0.3 per cent month-on-month, while the headline inflation was at negative 0.2 per cent in the eurozone and 0.7 per cent in the UK year-on-year.
Looking further ahead, while Q3 5 per cent GDP is unlikely to be sustainable, we are still expecting key macro developments to be supportive of a slightly slower yet steady and robust growth picture during Q4. This is despite muted price pressures (aligned with consensus targets of -0.3 per cent CPI and PPI).
Cyclical activity will remain, assisted by lower oil prices, and the US Federal Reserve's hesitation in moving rates higher too soon. Bottom line upward USD trajectory will be maintained, with the trajectory of the curve however somewhat flattening.
Nine-year low for the euro
The euro has now reached a nine-year low, but there's been a shirt in short-term outlook from bearish to neutral. There are three key reasons for this.
First, the euro lost 1.35 per cent last week and has now lost significant ground during and since Q4 2014, thus euro shorting for the time being appears crowded. Secondly, there's potential for a smaller-than-expected balance sheet expansion: €500 billion versus the €1 trillion sighted in December. As such, language bordering on "unlimited intervention" is likely to be avoided.
Finally, investors are looking towards a period of heightened price activity as they prepare for a major QE program from the ECB when they next meet on the 22nd of January. Followed by Greek elections on Jan 25, which threaten renewed conflict with the euro area and IMF, near-term barriers are now in place at 1.19 for the week ahead.
Despite that short-term neutral view, the longer term outlook remains bearish. We're eyeing a six-month target of 1.100 based off diverging monetary settings. The ECB has laid the foundations for a fundamentally weak currency over the coming 12 months with any rallies representing short-covering.
Michael Judge is Corporate Foreign Exchange Dealer at OzForex, a global supplier of online international payment services and a key provider of Forex news. OzForex Group Limited is a publicly listed entity with shares traded on the Australian Securities Exchange under the code "OFX".