Australian Dollar May Fall on Jobs Data, Economic Plateauing, China Tension

Australian Dollar May Fall on Jobs Data, Economic Plateauing, China Tension

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AUSTRALIAN DOLLAR FUNDAMENTAL OUTLOOK: BEARISH

  • Australian Dollar is focusingon the publication of crucial local employment statistics
  • Local inflation prospectsflatlining with AUD index, domestic economic performance
  • Geopolitical tension withChina adding another headwind to cycle-sensitive Aussie

Australian Dollar Eyes Local Employment Data

The Australian Dollar will be closely watching the release of highly-scrutinized employment data on September 17. The event’s typical capacity for market-moving influence could mean a significant burst of volatility following the release. Better-than-expected data could push the cycle-sensitive AUD higher and help it breach key technical levels.

Employment Change for August:

Expected: 25.0k

Prior: 114.7k

Unemployment Rate for August: Expected: 7.6% Prior: 7.5%

Participation Rate for August: Expected: 64.7% Prior: 64.7%

Conversely, a cascade of unexpectedly poor data prints could sour risk appetite and hammer the Australian Dollar. Robust demand for cycle-sensitive FX has helped push the Aussie higher, but recent price action – as I will show below – indicates the start of what appears to be a period of plateauing. Not entirely by coincidence, other key indicators are also showing a similar dynamic.

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Australian Dollar Plateauing With Economic Data Performance, Inflation Prospects

In the beginning of the coronavirus pandemic, markets experienced an aggressive selloff and economic data – along with sentiment and optimism about the future – also plunged. However, as fresh data began to pour in, economic statistics started outperforming analyst’s expectations. This seemed to indicate that initial forecasts of the recession were gloomier than what had come to pass.

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Australian and Global Economic Performance Plateauing

Austalian Economic Surprise Index

Source: Bloomberg

Having said that, with more data to reference, analysts are re-calibrating their assessment of the economy, and more modest forecasts could mean less aggressive outperformance. As a result, indicators such as these may begin to show signs of flatlining. The chart above shows Australian data has started to significantly underperform relative to economists’ expectations.

This also applies on a global scale, although the data is far less choppy and its decline is more gradual. The underlying commonality though is that both are broadly plateauing as markets remain suspended on diverging policy approaches to the pandemic. Some governments – like the UK – are taking more aggressive approaches while others are becoming more lax.

Australian Dollar Flatlining With Inflation Expectations After Aggressive Rally

Australian Dollar vs inflation

Source: Bloomberg

Not entirely by coincidence, the Australian Dollar and local inflation prospects – measured by the price of zero coupon AUD inflation swaps – are also plateauing. They are flatlining around the same levels before the market plunge in March. Where these indicators go from here at this critical juncture may precede and significant plunge or bold resumption of the prior uptrend.

Rising Tension With China

Furthermore, rising geopolitical tensions between Australia and China – its largest trading partner – is another potential catalyst which may curb AUD’s gains. Tension escalated after Australia called for an international and independent inquiry into the causes and handling of the coronavirus outbreak in Wuhan, China.

Beijing was publicly insulted by the measure, and imposed tariffs on several key goods shortly after (though they claim it had nothing to do with Australia’s stance). The dispute may now start aggressively impacting key industries and sectors like banks and consumer firms that make up almost 50 percent of the weight of the ASX, Australia benchmark equity index.

Fewer migrants and students travelling internationally could not only undermine domestic economic activity but severely impact housing prices. Looking ahead, if China and Australia continue to undergo a quiet death of decoupling in a recession, the Australian Dollar may capitulate and undergo a brief but potentially aggressive corrective pullback.

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or@ZabelinDimitrion Twitter

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