Australian Dollar Looks to China Plenum to Inform RBA Outlook

Fundamental Forecast for Australian Dollar: Neutral

• Aussie Dollar Looks to China Plenum Outcome to Set Tone for the Week Ahead

• Risk Sentiment a Key Aussie Catalyst as “Fed-Speak” Drives QE “Taper” Outlook

• DailyFXSSI Sentiment Gauge, Technical Positioning Point to AUD/USD Weakness

The Australian Dollar faces heavy weekend event risk as over 300 Chinese leaders including President Xi Jinping and Premier Li Keqiang gather for the third Plenum, a sit-down of the ruling party’s top brass that typically focuses on economic policy. Comments from Yu Zhengsheng, the number-four ranked politician in the current administration, pointed to “unprecedented” reforms to be unveiled. The range of possible issues on the docket is far-reaching and may include anything from financial sector reform (including foreign exchange liberalization) to changes in tax policy and land ownership rules.

Broadly speaking, the central theme of Mr Xi’s economic policy vision seems to be China’s transition from an export-driven to a consumer-based growth model. That makes sense: taken collectively, the West has been a relatively poor customer over the past decade. Consumption in China’s top rich-world export markets in North America and Europe has been hobbled by back-to-back crises over the past decade, starting with the Dot-com bust and continuing most recently with the Eurozone debt fiasco. Mr Xi has been frank about the growth implications of the transition, saying the pace of economic expansion is likely to slow.

With that in mind, the top concern for the Australian Dollar is the extent to which the reforms adopted at the Plenum will impact near-term performance and thereby shape demand for Australia’s own export prospects. China is the top overseas market for the country’s pivotal mining sector and signs of an accelerated slowdown that erodes demand may translate into expectations of a dovish policy shift at the RBA. Needless to say, such an outcome would bode ill for the Aussie. As it stands, the markets are pricing in 13bps in RBA tightening over the next 12 months, according to data from Credit Suisse. The central bank acknowledged the need for accommodation but argued support would come as past rate cuts continue to filter into the economy after last week’s policy meeting.

External forces are likewise an important consideration. AUD/USD continues to show a significant correlation with our DailyFX Risk-Reward Index, a gauge of underlying risk sentiment trends. This points to a sensitivity to shifts in risk appetite as markets continue to work out the likely timing of the first reduction in the Federal Reserve’s QE3 stimulus program. A string of upbeat outcomes on top-tier US economic indicators including ISM, GDP and NFP figures suggests October’s government shutdown may not delay the “tapering” of asset purchases as many have come to expect. The data docket is sparse next week, but a busy line-up of Fed commentary including a speech form Chairman Bernanke himself will keep speculation elevated. Comments supportive of a relatively sooner move to slim down QE are likely to weigh on the Aussie along with overall risk appetite, and vice versa. -IS

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