Aussie Dollar Focused on China Growth Bets, Fed Taper Outlook

Fundamental Forecast for Australian Dollar: Neutral

• Australian Dollar Looks to HSBC PMI Data to Help Establish China Growth Outlook

• FOMC Minutes to Drive Aussie Volatility as Risk Trends Respond to QE Taper Bets

• DailyFXSSI Speculative Sentiment Gauge Continues to Point to AUD/USD Weakness

The Australian Dollar managed to reverse all of its intraweek losses to close Friday’s trade with a slight gain as risk appetite firmed following supportive comments from Fed Chair nominee Janet Yellen in her confirmation hearing yesterday. The would-be successor to Ben Bernanke said she saw dangers in ending QE too early, saying the Fed must not remove policy support while the recovery remains “fragile”. She added that there is “no set time” for tapering asset purchases. Investors took the remarks as confirmation of Yellen’s dovish credentials, speculating that her ascendancy will translate into a longer-lasting “full-sized” QE3 effort.

News-flow out of also China helped as the official Xinhua news agency began to unveil the details of the reforms agreed-upon at the third plenary session of the Communist Party that concluded on November 12. A wide range of initiatives is to be undertaken, with some of the most notable including: establishing more free trade zones, granting permission for private investors to set up small banks, easing of the one-child policy, and loosening the “hukou” system (which eats away at disposable incomes by denying access to social services to migrant workers, forcing them to pay for them out of pocket). The deadline to implement these policy objectives has been set to 2020.

Looking ahead, a quiet domestic economic calendar is likely to see the same forces in the forefront. Indeed, minutes from this month’s RBA meeting amount to the only bit of noteworthy Australian event risk. The release tends to fall closely in line with the policy statement released at the time of the original rate decision announcement, meaning traders are unlikely to find anything materially game-changing in the text to spark Aussie volatility. In China, all eyes will be on HSBC’s November flash Manufacturing PMI report. A close relationship between Chinese GDP growth expectations and the Australian unit suggests signs of slowing factory-sector activity are likely to weigh on the currency, and vice versa.

On the risk sentiment front, all eyes will be on the release of minutes from last month’s FOMC meeting as Fed “taper” speculation continues. Investors will carefully comb through the language of the release to help establish the extent to which Fed officials saw fiscal drag from October’s US government shutdown delaying a cutback in asset purchases. Recalling the ultimately unfounded fears of fiscal retrenchment from the payroll tax hike and “sequester” spending cuts on the US recovery earlier this year, Ben Bernanke are unlikely to have been especially concerned, at least absent concrete data arguing otherwise. This may boost the US Dollar and weigh on the Aussie after Yellen primed the market for a dovish policy lean once again. Retail Sales and CPI releases headline the US data docket. - IS

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