Synopsis:

SocGen discusses the Australian dollar's recent struggles and potential for recovery. Although the AUD has been impacted by downward growth revisions earlier this year, recent stabilization in forecasts and a quieter economic calendar could provide an opportunity for the AUD to recover if market volatility decreases.

Key Points:

1. Growth Forecasts:

   • Revisions and Steadiness: The AUD was previously affected by downward revisions in growth forecasts relative to the US. Recently, these forecasts have steadied, predicting Australian growth to be about 1% slower this year and 0.4% faster next year.
   • Interest Rate Divergence: Despite expectations that the AUD would benefit from a divergence in short-term rates as the market prices cuts in the US and the RBA shows less eagerness to act, the AUD has yet to recover lost ground against the USD.

2. Impact of Risk Sentiment and Volatility:

   • Recent Weakness: The AUD has fallen sharply against both the yen and yuan, indicating sensitivity to risk sentiment.
   • Quiet Economic Calendar: A quieter economic calendar could help reduce volatility, providing a stabilizing effect on the AUD.
   • Equity Markets: The performance of equity markets is crucial, as falling bond yields in a 'risk-on' market can soften the impact of falling share prices on economic confidence.

3. Potential for Recovery:

   • Risk-Sensitive Currencies: If volatility decreases, risk-sensitive currencies like the AUD, NOK, and SEK could outperform the USD.
   • Key Data Points: Upcoming data releases such as Norwegian CPI and Canadian payroll data are among the highlights this week.
   • Market Sentiment: A lack of new economic news might allow volatility to decrease, supporting a gradual recovery of the AUD and other risk-sensitive currencies.

Conclusion:

SocGen suggests that while the AUD has stabilized in growth forecasts, its recovery against the USD has been limited by market volatility and risk sentiment. A quieter economic calendar and potential reduction in volatility could provide an opportunity for the AUD to recover. Monitoring equity markets will be key, as their performance can significantly influence economic confidence and currency movements. If market volatility decreases, the AUD, along with NOK and SEK, could see a recovery against the USD.