Australian dollar price action is likely to continue ignoring fundamental data to take its cues from trends in risk sentiment.
Fundamental Outlook For Australian Dollar: Bearish - Australians Expect Lower Inflation in September - Consumer Confidence Higher on Rate Cut Expectations - Employment Change Beats Expectations, Jobless Rate Falls Next week’s economic calendar is relatively bare. Governor Glenn Stevens and other policymakers at the Reserve Bank of Australia have been very candid about the direction of monetary policy, so it is unlikely that the release of the minutes from the last meeting will produce anything substantive to affect price action. Ironically, Westpac’s Leading Index is a bit too backward looking, offering a reading of broad economic health for July where we have seen a good amount of August and even September data in recent weeks. In any case, the metric is likely to see further downside as growth stagnates in the larger antipodean economy. Growth in the Leading Index has already slowed over 66% since April. Interest rate forecasts remain generally unchanged, with index swaps calling for 100 basis points in cuts over the next 12 months. On balance, Australian dollar price action is likely to continue taking its cues from trends in risk sentiment. Last week, we had discussed at length the seemingly inexplicable knee-jerk trading patterns of the forex market. We observed an inverse relationship between the performance of global equities and the US dollar: the greenback sold off as stocks rallied following the bailout of Fannie May and Freddie Mac only to see the move reverse course as stock markets were spooked by troubles at Lehman Brothers and the dollar boomed across the board. We suggested that the relationship owed to cross-asset capital flows: fears of a collapse at a major institution (Fannie/Freddie, Lehman) saw investors cash out of risky assets (i.e. stocks). Considering the interest rate outlook for 2009, it makes sense that the cash of choice was the US dollar. Indeed, bond yields forecast that the Federal Reserve will begin raising rates in 2009 while most other central banks will cut them. Global equity trading fell a whopping -37% in the year to August, bolstering the argument for dollar appreciation as a result of risk aversion. Friday saw stock markets rally and the greenback give back ground against the majors (including its Australian counterpart) as the US Federal Reserve and Treasury department were said to be in the process of lining up a consortium of private buyers for Lehman Brothers. Should the deal move forward smoothly and the coast remain clear of major default risk elsewhere, the Australian dollar will have room to retrace recent losses. Otherwise, the US dollar will continue its breakneck rally. - IS