Fundamental Forecast for Australian Dollar:Bearish

The Australian dollar pared the advance from the previous month following a shift in risk sentiment, but we may see the high-yielding currency regain its footing over the following week should the economic docket reinforce an improved outlook for the isle-nation. Although we’re expecting to see a 1.5% rise in home loans, the labor report for October highlights the biggest even risk for theAussie as the Reserve Bank of Australia tries to deliver on its dual mandate to ensure price stability while fostering full-employment.

However, market participants may show a mixed reaction to the release as the jobless rate is projected to increase to 5.3% even as the economy is anticipated to have created 10K jobs from the previous month. Should the data reflect discourage workers leaving the labor force, the development would dampen the outlook for future growth, and the Reserve Bank of Australia may continue to scale back the rate hikes from the previous year as the region faces a slowing recovery. According to Credit Suisse overnight index swaps, market participants still see the RBA lowering the benchmark interest rate by another 100bp over the next 12-months, and Governor Glenn Stevens may continue to soften his hawkish tone for monetary policy as the central bank the marked appreciation in the local currency bears down on growth and inflation. As the fundamental outlook deteriorates, we are likely to see the central bank take additional steps to shield the economy, and the RBA may carry its easing cycle into the following year as the slowdown in global growth dampens the prospects for an export-led recovery.

As the AUD/USD carves out another top just below 1.0800, the pullback from 1.0752 may gather pace in the days ahead, and the event risks on tap for the following week may have a limited impact on theAussie as the central bank casts a weakened outlook for the region. In turn, we may see the Australian dollar continue to give back the rebound from 0.9390, and the exchange rate may come up against the 38.2% Fibonacci retracement from the 2010 low to the 2011 high around 0.9930-50 to test for near-term support.– DS