– Australian Dollar continues to outperform
– Index of Australian economic activity surprises to the topside
– Extreme sentiment nonetheless warns of Australian Dollar reversal

The Australian Dollar finished the week as the top-performing G10 currency on similar outperformance in the US S&P 500 and broader financial market risk sentiment. Strong economic data and relatively hawkish Reserve Bank of Australia rhetoric only boosted the resurgent currency’s cause. Indeed, everything seemed to work in the Aussie’s favor and short-term momentum plainly favors further gains. Unpredictable markets have nonetheless shown that financial market flows can and do shift rapidly on a moment’s notice. A virtually empty upcoming week of economic event risk suggests that the Australian Dollar will almost-solely trade off of moves in the US S&P 500 and broader financial market risk sentiment.

Bullish forecasts for Australian interest rates should continue to support the domestic currency through times of outperformance in the FX Carry Trade, but traders should remain mindful that high interest rates must be kept in context. Yield-seeking investors will always prefer buying the currency that offers superior return. Yet strong exchange rate moves can easily eliminate the gains from interest rate differentials. Such a dynamic underlines why the Australian Dollar will likely remain correlated to financial risk appetite through the foreseeable future.

The S&P 500 finished the week higher and very recent momentum favours further gains. In fact, the benchmark index has now retraced a full 50% of the declines it saw through late January and early February. Despite signs of fragile economic growth, speculators seem willing to push equities to fresh highs. Yet it serves to note that trading volume has consistently been lower through days of rallies and heavier through days of declines. Such poor participation in market advances suggests that the S&P 500 could continue lower through the foreseeable future. Yet as any experienced trader will tell you, the market can remain overbought for far longer than you might expect. We hold a cautiously bullish stance on the Australian Dollar through the very short-term, but we likewise believe that the currency will head lower through the remainder of the year.

For weekly forecasts for the Aussie Dollar, visit DailyFX.com.

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