aud fundamentals

Australian Dollar Looks to G-20 Summit, Risk Trends for Direction Cues

Saturday, 15 November 2008 00:45:51 GMT  |  Ilya Spivak, Currency Analyst

The Australian Dollar will again find itself at the mercy of risk sentiment as a light economic calendar is unlikely to produce a catalyst to derail the priced-in fundamental outlook familiar to forex traders.

Fundamental Outlook for Australian Dollar: Bearish

- Business Confidence fell to the lowest in 11 years, says National Australia Bank
- Westpac Consumer Confidence rebounds in November on rate cuts, fiscal boost
- RBA slashes GDP growth forecasts, signals more interest rate cuts

The Australian Dollar will again find itself at the mercy of risk sentiment as a light economic calendar is unlikely to produce a catalyst to derail the priced-in fundamental outlook familiar to forex traders. The Retail Sales reading is expected to see receipts correct a bit to grow 0.4% in the third quarter versus a -0.6% contraction in the three months through June. Still, traders are likely to take the improvement with a grain of salt with the pace of sales growth slower by close to 80% from a year before. Economic slowdown is likely to be equally on display in September’s Westpac Leading Index figure. The release matched a 5-year low in August, suggesting the economy was growing at an annualized rate of just 2.5% (as compared to the trend average at 4%). Economists’ forecasts suggest the pace of annual growth slowed to a near-standstill reading at 0.4% by the end of the third quarter. Motor Vehicle Sales too is likely to extend loses in October as the shaky economy and limited credit access steers consumers away from big-ticket purchases. On balance, these releases collectively point to substantially more monetary easing ahead for the larger antipodean country (as is sure to be telegraphed in the release of the minutes from the last RBA policy meeting). Looking at overnight index swaps, the markets are pricing in a 0.75 to 1.0 percent rate cut at the RBA’s next meeting in December with a total of 150-175 basis points in easing over the next 12 months.

All told, the data docket is set up to add to but not meaningfully alter the established outlook for the Australian economy. The upcoming G-20 summit holds far more market-moving potential. The heads of state from the world’s top 20 economies are set to meet in Washington, DC over the weekend to hash out a joint plan for dealing with what the International Monetary Fund is forecasting to be a global recession of a magnitude unseen since the Second World War. A preliminary meeting of the G-20 finance ministers in San Paolo, Brazil last week issued a statement urging countries to use “all their policy flexibility, [including] monetary and fiscal policy.” The action plan (or lack thereof) that will emerge at the beginning of next week will be instrumental in shaping risk appetite going forward: if the markets find the outcome favorable, the Australian Dollar will have room to rise as traders re-establish exposure to risky assets; otherwise, the Aussie will again fall victim to the US Dollar and the Japanese Yen. The technical outlook cautiously favors the former scenario, with AUDUSD showing an inverted Head and Shoulders chart formation and positive divergence with the RSI oscillator.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars