aud fundamentals

Australian Dollar Trading to Follow Global Stock Performance

Saturday, 06 December 2008 01:24:35 GMT  |  Ilya Spivak, Currency Analyst

Australian dollar price action was restricted to a clearly defined trading range last week despite a heavy dose of economic event risk. The data docket is markedly less intense in the coming week, with traders surely facing yet another week of risk-driven trading.

Fundamental Outlook for Australian Dollar: Bearish

- Reserve Bank of Australia Lowers Rates 1%, Hints Cuts are Over
- Trade Surplus Surges in October as Imports Dwindle
- Australian Economic Growth Drops to Lowest in 8 Years

Australian dollar price action was restricted to a clearly defined trading range last week despite a heavy dose of economic event risk. Ignoring the fundamentals, the currency looked to risk sentiment as the impetus for movement. Indeed, as the Dow Jones Industrial Average retraced 50% of the preceding week’s gains and then settled to consolidate, so too did AUDUSD. Indeed, the two have been closely linked since mid-October and now show a hefty 91.8% correlation.

The data docket is markedly less intense in the coming week, giving little reason to suspect that the currency will now become responsive to fundamental releases. Leading indicators point to another decline for National Australia Bank’s measure of business confidence: AiG figures gauging expected performance in the Manufacturing and Services sectors saw both metrics drop to the lowest in nearly 6 years in November. By contrast, Westpac Consumer Confidence bounced sharply higher to 4.3% in November, boosted by initial elation at massive RBA interest rate cuts and a fiscal handout of over A$10 billion. However, traders are unlikely to see much follow-through in the December release as it becomes clear that the Reserve Bank has shifted gears to neutral all the while firms continue to translate a dreary outlook into job cuts. While headline figures showed the labor market added an impressive 34.3k jobs in October, not all is as rosy as it seems: most of the gains were had in part-time employment, were the economy added 43.5k jobs. Meanwhile, full time jobs actually lost -9.2k employment places. The shift from full-time to part-time employment suggests that companies are scaling back on labor expenses, a move consistent with expectations of slowing global demand. Economists expect the economy to shed -15k jobs in November to push the unemployment rate to 4.4%, the highest in a year. Barring any profound surprises, this data offers little that has yet to be priced into the Australian dollar exchange rate.

On balance, traders surely face yet another week of risk-driven trading. It is unclear whether negative US fundamentals still have much of an impact on equity markets after stocks closed Friday’s New York session with a gain of 3% despite news that the economy lost 533k jobs in November, the worst reading in 34 years. In any case, significant US event risk does not enter the picture until late in the week with the Retail Sales release. Seasonal forces may be the dominant catalyst at this point. Stock traders often intentionally close some positions as a loss in December to offset the capital gains tax burden. This then pushes shares higher through January as positions are re-established (a phenomenon called the “January effect”). Considering the massive drop in share prices this year, the only traders with any meaningful gains to be taxed were positioned short. Closing out some of this exposure will mean buying back shorted stock and thereby pushing markets higher. Should this materialize given current correlations between equities and forex markets, the Australian dollar will gain on safe-haven currencies like the US Dollar and the Japanese Yen.

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