Fundamental Forecast for the Australian Dollar: Neutral

Aussie Dollar Looks to Fed Rates Outlook, Risk Trends for Direction

US News-Flow in the Spotlight, Government Shutdown a Wild Card

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Another relatively quiet week on the domestic data front will see the Australian Dollar continue to look toward external developments for direction cues. Global slowdown fears and the outlook for Federal Reserve monetary policy continue to dominate the spotlight, with a busy docket of US event risk set to inform both narratives.

The message from a host of Fed officials since the September policy meeting has been broadly hawkish, with current and soon-to-be voters on the FOMC committee including Chair Janet Yellen making the case for “lift-off” in 2015. Another big round of official commentary is scheduled for next week. New York Fed President Bill Dudley, Chicago Fed President Charles Evans and Vice Chair Stanley Fischer haven’t weighed in on the post-meeting conversation thus far so their comments ought to be in focus.

Mr Evans may command particular attention as the most vocal dove among his colleagues. It would mean far more for him to sound off in favor of a 2015 rate hike than an established hawk like the Richmond Fed’s Jeff Lacker or even the middle-of-the-road Mr Fischer. The markets will almost certainly pay attention even if the pro-tightening message fails to get Evans’ endorsement. After all, a sole dissent on the dovish side of spectrum will not mean much more than a hawkish one did earlier this month, when Mr Lacker fruitlessly argued for a rate hike.

Turning to economic data, September’s US Employment report will take top billing, with expectations pointing to a 200k increase in non-farm payrolls. That would mark an improvement over the 173k gain in August and help bolster the case for the start of Fed stimulus withdrawal. Taken together with upbeat Fed-speak, this stands to boost the US Dollar against its top counterparts including the Aussie.

Supportive US news-flow may also calm global slowdown fears and offer a boost to risk appetite however, which might be expected to buoy the sentiment-linked Australian unit. This scenario will probably depend on the degree of risk aversion established beyond US borders, with Chinese PMI figures especially of note considering investors’ focus on tumult in the world’s second-largest economy as the driver of recent jitters.

Data releases out of the East Asian powerhouse have increasingly disappointed relative to consensus forecasts since late July, opening the door for continued under-performance. If this proves to be enough to keep the markets in a defensive posture, the prospect of on-coming Fed stimulus withdrawal will probably be seen as a headwind and punish the Aussie.

A possible shutdown of the US government represents a wild card as lawmakers remain at loggerheads over budgeting beyond the third quarter. Absent an agreement, traders may become concerned that another prolonged period of downtime similar to that of 2013 will exact a stiff toll on economic growth. This seems likely to push against Fed tightening bets as well as undermine global performance bets at large, triggering a broad-based deterioration in sentiment and sending the Aussie downward alongside the spectrum of high-yielding and cycle-sensitive assets.