AUSTRALIAN DOLLAR FUNDAMENTAL FORECAST: NEUTRAL

• The Australian Dollar rose on Brexit deal expectations, local jobs data
• If UK PM Boris Johnson fails to pass his deal at home, AUD may fall
• Global growth slowdown could undermine near-term AUD/USD gains

AUSTRALIAN DOLLAR RECAP

The Australian Dollar spent most of last week rallying against major currencies such as the US Dollar and Japanese Yen but underperformed against the British Pound. Domestically, it could thank a drop in Australian unemployment which almost entirely took off bets of a November RBA rate cut. Meanwhile, hopes of a Brexit deal propelled equities, supporting the sentiment-linked AUD as GBP rose.

AUSTRALIAN DOLLAR WEEK AHEAD

Looking to the upcoming week, there isn’t much for AUD/USD, AUD/JPY and GBP/AUD to look forward to on the domestic front. We will get Commonwealth Bank of Australia (CBA) measurements of manufacturing and services PMI, but these may do little to significantly calculate current estimates of near-term easing from Australia’s central bank.

BREXIT DEAL OR EXTENSION?

Rather, the focus will likely be on the external front, particularly at Monday’s market open. That is because over the weekend, the UK House of Commons will be voting on Boris Johnson’s Brexit agreement. Last week, a deal was reached between the United Kingdom and the European Union. Now, it heads to Parliament to see if the Prime Minister can gather enough votes to seal the deal.

This will be a daunting task. Mr Johnson and his government are over 40 seats short of a majority. This means that he will be relying on support from the Democratic Unionist Party (DUP) in order to get enough votes. Last week, the DUP made it well known that they would not support his Brexit deal. If Mr Johnson fails to get enough votes, he will most likely be forced to ask for an extension of the Brexit deadline.

If this ends up being the case, a reversal of some of the progress in risk trends and the S&P 500 could be due. This would in turn bode ill for the Australian Dollar. But, given the nature of unpredictability in these unprecedented negotiations, certainty is all but lacking. The Aussie may stand to lose the most in this case against the anti-risk Japanese Yen should adequate support fail to materialize.

OTHER KEY FUNDAMENTAL THEMES – TRADE WARS, EARNINGS, US DATA

Some may also attribute the rosy progress in sentiment to the US and China reaching a “phase one” agreement in trade talks. But, risks still remain that the second go at a trade truce falls apart, as it did after the G20 Summit back in June. Keep a close eye on ongoing disputes/resolutions between the two economic powerhouses.

Last week, third quarter China GDP data undershot estimates with growth hovering around 30-year lows. As a China liquid proxy, the Australian Dollar is vulnerable to not just slowing growth from the world’s second-largest economy, but a deterioration in global expansion prospects – see chart below. This past week, the IMF lowered 2019 global GDP estimates to its weakest since the financial crisis.

As such, near-term gains in the Australian Dollar should be taken with a grain of salt as medium-term fundamental themes risk undermining its progress.

GLOBAL ECONOMIC SLOWDOWN