Australian Dollar to Look Past Economic Data, Follow Stock Performance

Fundamental Outlook for Australian Dollar: Bearish

- Retail Sales Grow Less Than Expected
- Reserve Bank of Australia Surprises, Signals Rate Cuts Nearly Over
- Australia to See Recession in 2009, Says Westpac
- RBA Intervened in Forex Market, Spent Record 3 Billion to Boost Currency

Next week’s data docket is conspicuously uneventful, once again leaving the Australian dollar at the mercy of market risk sentiment. DEWR Skilled Vacancies hit the lowest in 8 years in October and companies are unlikely to re-start hiring in the following month with business confidence at record lows. The global scarcity of willing lenders will likely send October’s Private Sector Credit reading even deeper into the red after September’s print at 10.1%, the lowest since 2002. Without access to financing, Australians are unlikely to commit to big-ticket purchases, meaning the HIA New Home Sales reading is set to deliver another down month after dropping -1.8% in September. The quarterly Private Capital Expenditure reading is also likely to disappoint in the three months through September after Retail Sales fell short of economists’ forecasts to add an unimpressive 0.1% in the same period.

All told, forex traders have already had plenty of opportunities to price in expectations of a deep downturn for the larger antipodean economy, meaning the red ink set to paint the calendar is unlikely to drive price action. Meanwhile, the Aussie’s status as a relative “high yielder” has seen respond violently as jittery investors dumped risky assets (stocks, commodities, carry trades) for the relative safe haven of the US Dollar. In fact, the AUSDUSD exchange rate is now correlated with the MSCI Index of world stock performance by a staggering 96%. This dynamic was firmly on display in Friday’s trading session: after two consecutive days of heavy loses, a light calendar opened the door for Wall St to mount a relief rally. The return of risk appetite saw the Australian dollar gain impressive momentum, leading the other majors in gaining 3.55% against its US counterpart.

On balance, the recipe for next week’s trading is a familiar one. US GDP is set to deliver a second quarter of negative growth (confirming recession), Durable Goods Orders are expected to shrink -3%, and Home Sales are seen dropping -3.3% in October to fully reverse the gains from the preceding month. If these releases weigh on US stock performance, the Australian dollar will suffer loses. Alternatively, the early release of GDP as the first major data of the week could bring a peak in bearish sentiment as the certainty of recession produces a kind of calm born when one is faced with inevitability. This and the proximity of the Thanksgiving holiday may see subdued trading on US exchanges, opening the door for continued upside in AUDUSD.