GBP/AUD Range Restored By Bout Of Risk Aversion

 Trading Tip – A long position given the obvious bearish trend for the bear contradicts one of the cardinal rules-don’t go against the trend which increases the level of risk for the trade. Today’s disappointing U.S. consumer confidence and German business confidence reports have started to generate a wave of risk aversion which is weighing on the commodity dollars. A broader shift in sentiment could spark the anticipated reversal in equity markets and the resulting unwinding of the carry trade would be toxic for the Australian dollar. Absent an increase in pessimism for global growth, sterling losses could continue as the BoE continues to leave the door open for adding to their asset purchase program which has pushed out the horizon for a rate hike until at least the second half of 2010 and probably into 2011. Conversely, the RBA has been the most aggressive with three rate hikes under its belt to date and expectations for a fourth at their next policy meeting.

Event Risk for Australia and the U.K.

Australia – The fundamental calendar may have little impact on Aussie sentiment if we see a shift in broader risk trends, so traders should take that into consideration when determining the potential impact from upcoming event risk. Inflation data holds the greatest potential for creating volatility as rising prices would justify further tightening from the RBA and increase the high yielder’s spread over its counter parts which remain stuck at record low levels. Wage inflation is a primary concern for policy makers and the fourth quarter report could be the most significant release. The Conference Board Leading index for December will provide a gauge into the prospects of the economy over the next six months. An improvement from November’s decline of 0.3% will only add to the strong growth outlook for the antipode nation.

U.K. – A dismal mortgage approval report and dovish rhetoric from the BoE when testifying before parliament may leave the remaining release ahead of the rate decision insignificant. U.K. GDP and manufacturing figures will be watched to see if the central banks forecasts for a protracted recovery are supported by the data and could impact price action. Strong growth and output may cast the MPC in a overly cautious light which may generate sterling bullish sentiment.