Event risks for AUD rises alongside possibility of RBA rate cut

Of course, as is always the case for AUD, events in China will be watched closely in coming days.

However, there is a significant domestic risk ahead too. Greg Gibbs at RBS says:

"The market pricing for an RBA rate cut next week increased from around 50% odds after modestly higher than expected CPI data last week to currently around 70%. This has helped keep the AUD hemmed in despite a generally weaker USD."
Gibbs points out that RBA watcher and respected media commentator Alan Mitchell wrote in the Australian Financial Journal that the RBA could consider macro-prudential measures to control the housing market while it pursued a lower interest rate environment designed to help weaken the AUD; policies that appear imminent in New Zealand and have been employed in a number of other countries.

As the article points out, such measures appear to have been effective in cooling the housing market in Canada.

Ignore the politics

Sean Callow at Westpac says talk of Australian elections are unlikely to be a major worry for the local currency:

"Attention is now focused more on 21 September but other dates as late as Nov are also possible. Some have been arguing that a 31 Aug poll would lower the chances of an RBA cut on 6 Aug. However, we believe it would make no difference given Governor Stevens’ willingness to hike rates in the Nov 2007 election campaign.

"And of course failure to deliver a rate cut warranted by low inflation and a soft economy would be viewed by many as a political act, so best just to ignore politics."

Australian dollar steadies alongside iron ore prices

The performance of commodity prices also remain key to the value of the Australian dollar.

Greg Gibbs at RBS notes that iron ore prices have firmed up, the AUD/USD has also done so:

"Over the last week spot iron ore prices edged higher from $131.7 to $132.6/t, a high since April, up from the low at end-May of $110.4. However, 12 month forward iron or prices slipped a bit from $114.7 to 113.9 last week, but have been relatively stable in recent weeks, firming from their low around $108 in May."

Heavy resistance dominates Australian dollar outlook

Sean Lee at FXWW says impending resistance levels could scupper the AUS dollar's recovery: "I’ve been trying to build a long AUD/USD position for some weeks now and I feel that if we can’t break above .9350 in the next few sessions then it’s probably going to struggle to do so any-time soon.

"The AUD didn’t really react to the sharp fall in the copper price. There isn’t a super-strong correlation here but nonetheless, the lack of any reaction does suggest that the bears are getting tired."

Luc Luyet at MIG Bank says he is bearish on the Australian dollar's outlook:

"AUD/USD is moving sideways since 20 June. A potential short-term base formation could be underway. However, the strong resistance at 0.9345 needs to be broken to confirm such scenario. Hourly supports are at 0.9228 (26/07/2013 low) and 0.9138.

"In the medium-term, the break of the strong support at 0.9388 (04/10/2011 low) opens the way for a further medium-term decline."