aud fundamentals

Australian Dollar to Rise As Capital Flows Back to Risky Assets

Saturday, 08 November 2008 02:07:30 GMT  |  Ilya Spivak, Currency Analyst

The Australian Dollar faces a busy economic calendar next week, but forex traders are unlikely to see anything that would substantially alter the prevailing fundamental outlook. Stil, AUDUSD looks poised for short term sentiment-driven gains as credit market conditions continue to normalize.

Fundamental Outlook for Australian Dollar: Bearish

- RBA Surprises, Cuts Interest Rates 0.75%
- Retail Sales Decline Doubles Expectations in September
- Trade Surplus Unexpectedly Widens as Exports Surge
- Australia Adds 34k Jobs in October But Full-Time Positions Lower

The Australian Dollar faces a busy economic calendar next week, but forex traders are unlikely to see anything that would substantially alter the prevailing fundamental outlook. The Reserve Bank of Australia’s Quarterly Monetary Policy Statement is likely to offer familiar rhetoric justifying further reduction of borrowing costs. The markets are sure to take this in stride, with overnight index swaps already pricing in an additional 125-150 basis points in rate cuts over the next 12 months.

October’s NAB Business Confidence has room to rise, reflecting firms’ approval as the RBA slashed borrowing costs by a full percentage point. Still, sentiment is unlikely to pick up much traction having sunk to the lowest levels since 2001 as the spreading global slowdown erodes demand. The CEO of mining giant Rio Tinto recently pointed out that "the slowdown in Chinese economic growth is quickening and demand…won’t rebound until 2009” while RBA Governor Glenn Stevens warned of "significant weakness in the major industrial economies and...further signs that China and other parts of the developing world are slowing." Westpac Consumer Confidence will likely turn a similar dynamic into gains as well, with November’s reading taking into account the full 200 basis points of rate cuts since August. Here too, we are unlikely to see significant follow-through. Last week’s employment report revealed that the economy shed 9,200 full-time jobs. While 43.5k part-time jobs were added, the shift implies fewer payable hours and therefore lower disposable incomes.

On balance, the Australian Dollar looks poised for short term sentiment-driven gains against its US counterpart. As credit market conditions have started to normalize, investors have begun to cautiously move capital out of safe-haven assets (i.e. the greenback) and back into equities. This has produced an impressively strong inverse correlation between the US dollar and the MSCI World Stock Index. A retracement in USD-based pairs is therefore likely as the excesses of the credit crunch panic are corrected before the broader trend resumes. Last week saw AUDUSD break above near-term resistance, with bullish follow-through likely to see the pair test Fibonacci resistance at 0.7262.

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