Aussie Dollar Rally May Lack Follow-Through as Risk Appetite Sours

Talking Points:

Aussie Dollar rallies after 4Q GDP data weighs on RBA rate cut bets
US ADP jobs report, Fed’s Beige Book to guide FOMC policy outlook
Crude oil may rise on inventories data, helping to buoy risk sentiment

The Australian Dollar is outperforming in overnight trade following an upbeat set of fourth-quarter GDP figures. Output grew 0.6 percent, topping expectations calling for a 0.4 percent increase. The year-on-year growth rate rose to 3 percent, the highest in four years. The currency tracked a jump in front-end bond yields after the data crossed the wires, hinting the results reinforced yesterday’s upbeat RBA policy statement and weighed against rate cut speculation.

Looking ahead, a relatively quiet docket in European trading hours is likely to see traders focused on US news-flow. The ADP Employment report, the Fed’s Beige Book survey of regional economic conditions and the weekly set of crude oil inventory numbers are in the spotlight. Broadly speaking, all three results will serve as pace-setters for market-wide risk appetite trends.

Jobs data and the Fed’s assessment of the US business cycle will help inform bets on the likely FOMC rate hike path. Expectations have been firming over the past three weeks against a backdrop of improved data outcomes relative to consensus forecasts, with traders pricing one 25bps hike back into the consensus outlook for 2016. The latter may drive crude oil prices, whose recently strong correlation with stock prices have made them a pace-setter for sentiment in the eyes of investors.

Another round of strong US economic data that boosts tightening bets may trigger risk aversion as markets worry about the prospect of stimulus withdrawal against a backdrop of global slowdown.This may punish high-yielding FX including the Aussie and Kiwi Dollars alongside equities while boosting funding currencies like the Yen and Euro. A pop in crude oil may limit the slump in sentiment however if stockpiles fall as projected.

Are FX markets matching DailyFX analysts’ 2016 expectations so far? Find out here!

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