Australian Dollar to Track Stocks on Q1 Earnings Reports

 

The currency markets’ sensitivity to risk sentiment has recovered considerably over the past week. The Australian Dollar has been no different, with the 21-day correlation between the value of the high yielder’s average value against a basket of its top counterparts and the MSCI World Stock index now reading at a hefty 0.92. This suggests the Aussie will fill its familiar carry-currency role in the days ahead, following Wall Street’s ups and downs as companies across the size and industry spectrum report earnings for the first quarter of the year.

 

The markets’ approach to next week’s earnings calendar promises to be a sober one, with investors sizing up companies’ profits against a backdrop of fading stimulus of both the fiscal and monetary variety. Indeed, the boost from older government support is fading and rampant concerns about bulging deficits are likely to see politicians withhold further assistance. Meanwhile, most central banks (Japan excluded) have either started to remove accommodative policy or shifted to a neutral posture in anticipation of doing so. This means the world economy must now begin to rely on private demand to prolong the economy, suggesting that encouraging headline earnings figures absent robust revenue growth are unlikely to impress as they did in 2009. 

 

Developments in Greece and the looming election in the UK also present potent reasons for volatility in risk sentiment. Traders pared bets against the debt-ridden southern European nation on Friday, with Greek CDS spreads pulling back from a record high while the spread between Greek and German 10-year bond yields narrowing by the most in six weeks, on the back of encouraging comments from EU officials. The situation remains highly unstable however and any boost achieved through rhetoric is likely to prove temporary until something concrete is finally in place. As for the UK, markets have seemingly become acutely sensitive to every opinion poll ahead of the March 6 electoral contest, with the fiscal health of the economy in the balance as the deficit-hawk Conservatives square off against the ruling Labour party, whose sitting PM Gordon Brown would rather delay trimming the debt until the economy shows greater vigor.