Fundamental Forecast for the Australian Dollar: Neutral

• Australian Dollar gains as markets digest “Trump trade” volatility
• Upbeat US news-flow may boost Fed outlook, restart Aussie selloff
• Trump cabinet appointments remain a potent headline risk source

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The Australian Dollar embarked on a shallow recovery last week, as expected. The move appeared to be corrective after two weeks of aggressive selling in the wake of the US presidential election. Markets speculated that the policies to be pursued by President-elect Trump will be inflationary and require a steeper Fed rate hike path even as the RBA looks to be entrenched in wait-and-see mode. This had shifted relative yield spreads to the detriment of the Australian unit.

Another week devoid of big-ticket Australian event risk is ahead, keeping investors’ focus on broader macro-level trends. The US data docket is dense with noteworthy releases including the Fed’s favored PCE inflation gauge, a revised set of third-quarter GDP figures, and November’s Employment report. US economic news-flow has increasingly improved relative to consensus forecast since late October. More of the same may paint a picture of an economy running hotter than previously expected, encouraging a further hawkish shift in the projected 2017 Fed policy trajectory and weighing on the Aussie.

Furthermore, US political developments remain an important source of headline risk. The Trump cabinet continues to take shape but key economic policy posts have yet to be filled in the incoming administration. Investors are keen to see who will take up the reins of implanting the agenda that has sent them scrambling in recent weeks. Confidence-inspiring appointments to lead the departments of Treasury and Commerce as well as take up the role of US Trade Representative may reboot the so-called “Trump trade”, giving US yields another upward nudge and putting the Australian unit under pressure.