Australian Dollar May Remain Range Bound If Risk Appetite Fades

The Australian dollar was stuck in a tight range between 0.8100- 0.8200 throughout most of the week despite a bullish outlook from the RBA and a global equity rally. The minutes from the central bank’s July policy meeting showed that the committee expects the economy to gradually recover by the end of the year on the back of lower interest rates, government stimulus and household spending.

Australian Dollar May Remain Range Bound If Risk Appetite Fades

Fundamental Outlook for Australian Dollar: Neutral

- Producer prices fell 0.8% in the first quarter - the most on record
- Consumer prices fell to 1.5% from 2.5% on an annual basis in the second quarter
- The RBA minutes show growth expectations by year end

The Australian dollar was stuck in a tight range between 0.8100- 0.8200 throughout most of the week despite a bullish outlook from the RBA and a global equity rally. The minutes from the central bank’s July policy meeting showed that the committee expects the economy to gradually recover by the end of the year on the back of lower interest rates, government stimulus and household spending. On the economic front we saw producer prices drop by a record 0.8% in the second quarter and consumer prices fell to a 10 year low of 1.5% from 2.5% on an annualized basis. However, we saw inflation rise by 0.5% on the quarter with the core reading reaching 0.8% quarterly and only falling to 3.6% yearly. Therefore, we may have seen an end to the accommodative easing policy from the RBA which should start top raise interest rate expectations for the currency which is already one of the high yielders.

The economic docket will give us some insight into future activity with the Conference board leading index and the NAB business confidence readings on tap. A sharp improvement in both indicators is realistic given the improvement in the economy over the second quarter which could generate bullish Australian dollar sentiment. An expected 8.0% improvement in building approvals may add to the improving outlook for economic growth as lower interest rates is expected to have spurred activity. The TD securities inflation report may have the most market moving potential as a rise in prices could give a boost to interest rate expectations and generate bullish price action. However, we must keep an eye on risk appetite this week as a pull back in equities could weigh on the high yielder. There is also very solid resistance ahead with the yearly high of 0.8266 and the 61.8% Fibo of 0.9852-0.6009 at 0.8392. If we see those levels hold then the AUD/USD could look to erase recent gains