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Australian Dollar Stability Won’t Hold Through A Risk Rout

By , Chief Currency Strategist
29 January 2011 06:10 GMT
Australian_Dollar_Stability_Won_body_Picture_4.png, Australian Dollar Stability Won’t Hold Through A Risk Rout

Australian Dollar Stability Won’t Hold Through A Risk Rout

Fundamental Forecast for Australian Dollar: Bearish

There were a few remarkable developments from the financial markets this past week. For the first time in two months, the benchmark S&P 500 dropped below the bottom boundary of its steadfast bullish trend; while EURUSD put in for an overdue bearish correction after a three week climb. For fundamental traders, this is not coincidence as this is a well-known correlation founded in risk appetite trends. However, if sentiment is truly starting to waver; we would expect the high-yield pair to show the same tendencies. Not only is this pair’s sensitivity to risk trends significant; it is further weighed by the significant shift in interest rate expectations the Australian dollar. And yet, AUDUSD held its well-trodden range between 1.0000 and 0.9800. That said, should speculators confirm their intentions to unwinding risky positioning; the carry-bound Aussie currency will quickly fall in line. And perhaps we could even see some assistance from scheduled event risk.

We can identify many catalysts to potentially jump start the Australian dollar’s next move; but the underlying fundamental cause is what will define the distance and time associated to mere direction. Gauging speculative interests; we have already seen the first shot fired for a bearish charge. That said, a long weekend can calm frayed nerves. The masses need motivation. Perhaps the realization that emerging markets are making an effort to throw the breaks, advanced economies are starting to bounce between recession and debt troubles and tensions in the Middle East will pull us back to reality. In the meantime, we will keep an eye on a few specific fundamental sparks. The US employment figures are always worth speculative interest and a dramatic reaction. Perhaps more timely, though, is the mid-week EU meeting and Portuguese debt auction. The former event will tell us whether there will be any real follow up on open-ended promises to boost the region’s financial rescue. The debt auction will essentially be a vote of confidence in the region’s financial markets. Should the market vote it down, it could quickly bring back many diminished fears.

For the Aussie’s own part in this, the economic docket could encourage volatility of its own – and perhaps jumpstart a breakout should sentiment trends hold off. At the top of the docket is the infamous RBA rate decision. The floods that have devastated Queensland this past month will have a profound effect on economic activity. On the other hand, central bankers will need to balance this again the subsequent impact this development will have on inflation. Will they act to stabilize economic or price growth? A hold is almost certain; but we will need to interpret the statement that accompanies the decision to ascertain their intentions going forward. Anything that can be interpreted as a long-term neutral stance (or certainly a dovish turn) will send the Aussie dollar tumbling. From the rest of the docket, we will receive a well-rounded assessment of the economy. Indicators for trade, building approvals, personal credit, service and manufacturing activity covers many of the important sectors for the economy.JK

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29 January 2011 06:10 GMT