After shedding two cents from its high at US94.7c to trade as low as US92.7c last week, the Aussie dollar seemed destined to weaken further on the back of improving US economic conditions. However, despite threatening to break below its recent range between US92-95c, Friday’s North American employment report halted the downside momentum. Notwithstanding the strong number, US dollar profit-takers selling some of their long positions due to a slightly lower than forecast result saw the Australian dollar bounce back above the 93c handle.
This week, however, the Aussie dollar focus is sure to shift away from the US back to the raft of domestic economic data releases with Monday’s stronger than expected 0.6 per cent rise in June retail sales setting the tone early.
As the week progresses, the trade balance followed by the employment report will capture the market's attention, with the latter being the most likely to move the currency. There are some economists tipping the economy to have added as much as 20,000 jobs in July and, if the number does come in around that figure, we can expect the AUD/USD to push back towards the 94c level.
Any change from the RBA?
It doesn’t seem as though local data alone will be enough to move the Aussie out of this range, so if a larger move is to eventuate, the Reserve Bank will have to be responsible. Despite little expectation today, central bank meetings always gather plenty of attention. As the markets get desperate for something to drive direction it will be looking for the faintest of hints, scrutinising each word in the accompanying media release. If by some chance there is any change in the wording on the statement it could come on one of the following three fronts: inflation, the currency and policy setting.
It is expected the central bank will look through the recent spike in inflation and trot out the same line that “inflation should remain consistent with the target over the next one to two years”. Despite CPI pushing closer to the top end of the 2-3 per cent band, it is unlikely it will change this assessment this week.
If the RBA wants to make a statement, then it may place further emphasis on the exchange rate and shift from talk of it remaining “high by historical standards” to something slightly more aggressive. But this too is unlikely as the bank would be somewhat buoyed by the recent softening in the currency and the improvements in the US economy. It is time they need: time for the US dollar's strength to kick in and drag the Aussie dollar down.
The big question is whether or not monetary policy is still “appropriately configured” and if the “period of stability” in interest rates is coming nearer to completion. Even the slightest deviation from this front could see a spike in currency volatility.
Jim Vrondas is chief currency strategist, Asia-Pacific at OzForex, a global provider 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".