Australian Dollar to Rebound if Stock Markets Correct Higher

The MSCI World Stock Index, a gauge tracking global equities’ performance, has capped a fourth consecutive week of losses – the first such losing streak since July 2009. While this would suggest that risk aversion is still in play, a sudden reversal on US exchanges late into Friday’s session suggests an upward correction may be ahead. Indeed, the last two hours of trading saw the S&P 500 recovery from a 1.8% selloff and narrowly finish the day in positive territory.

Rumors that the European Union will announce a bail-out of debt-stricken Greece and Spain this weekend was cited as the reason for the sudden about-face in US trading. This seems plausible: from its inception, the European Union was always an arrangement of geopolitical expediency rather than sound economics. In fact, a plethora of economists have produced evidence over the years to show that even the original six western European nations that formed the common market did not have economies that were convergent enough to be unified into a single unit, which surely means the much shakier southern European ones were not even close. This means that, tough talk about fiscal discipline notwithstanding, the European Union does not see it as politically acceptable to allow an economic failure that would compromise the structural integrity of the regional bloc. On balance, this means a bail-out is probable at some point. The short-term implications of such a rescue would likely give a short boost to investor confidence, allowing for an upward correction in risky assets. The near-term correlation between the MSCI World Stock Index and AUDUSD now stands at 0.96, suggesting that any such upswing will bring the high-yielding currency along for the ride.

While secondary to risk sentiment in terms of near term market-moving potential, the economic calendar may also prove of note as January’s labor market figures cross the wires. Expectations call for the economy to gain 15,000 jobs while the unemployment rate rises slightly to 5.6%. The report has topped economists’ forecasts every month since June 2009, so traders are likely growing fairly used to seeing a better-than-expected outcome. Against this backdrop of complacency, a downside surprise may set off a considerable selloff, and leading employment metrics in last week’s series of PMI reports from the Australian Industry Group (AiG) point to such an outcome.