Volatility Kicks in for 2023

Australian Dollar Forecast: Neutral

• The Australian Dollar remains susceptible to extrinsic factors for now
• China’s re-opening has hit a few hurdles but there might be a bright spot
• The Federal Reserve continues to dominate proceedings. Where to for AUD/USD?

The Australian Dollar ricocheted through the first week of the year with an average daily range over 2% on each active trading day. After all the noise, it finished around 1% higher for the week.

Contributing factors to the volatility appeared to be largely external with Chinese policies, Federal Reserve meeting minutes and US jobs data all playing a role.

China’s effort to extricate itself from the economically strangling zero-case Covid-19 policy seems to be presenting several challenges. While the official data depicts a situation that is under control, the anecdotal evidence from hospitals and morgues suggests a more problematic transition.

The impact on markets is that Chinese economic activity may not accelerate as fast as had been hoped for.

Another policy tilt from Beijing could see an easing of restrictions for some Australian exports, such as coal, as the frosty relationship between the two countries might be thawing.

In this event, the benefit to Australia’s trade balance may not be overly significant. Many of the affected businesses found new markets for their exports since the bans began

The situation highlighted the risk of relying too heavily on one customer and many enterprises went about diversifying their customer base.

As it stands, Australia’s trade surplus remains at record highs and the November number will be known this Thursday. A Bloomberg survey of economists estimates another AUD 11.5 billion boost to the local economy for that month.

Perceptions around the rate path for the Fed in 2023 have been a driving force for US Dollar gyrations that have flowed into AUD/USD.

The Aussie Dollar is seen as linked to global growth due to the nature of exports underpinning it. As a result, it is seen as a ‘high beta’ currency.

When the global macroeconomic environment sways between a positive or negative outlook, moves in AUD/USD tend to be larger than most other currencies against the US Dollar. With this in mind the outlook for the ‘big dollar’ may continue to steer the Aussie.

Last week, the Federal Open Market Committee (FOMC) meeting minutes revealed that the Fed is likely to keep rates at a higher level and for longer than the market had been anticipating.

In the week ahead, further machinations around US monetary policy could see more wild swings in AUD/USD.

Domestically, in the addition to the trade data, building approval numbers will be released on Monday, followed by retail sales data on Wednesday.

AUD/USD AND COAL CHART

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter