The World's Weakest Currency...And It's Not the Euro
Ominous signs of slowing growth in Australia have made the Aussie the world’s worst-performing currency, quite a feat considering the political and economic risks now running rampant through the Eurozone.
The Australian dollar (AUD) fell to a three-month low, breaking the 1.0200 barrier against the US dollar (USD) for the first time this year as sentiment towards the commodity currency continued to sour on fears that the economy down under is beginning to slow materially. An earlier report on construction work showed a surprising contraction of -0.1% versus 1.5% eyed. This was the first decline in the construction sector in more than a year.
The drop in construction was the result of a decline in engineering work involving mines, bridges, and roads. Residential construction, however, continued to expand at 1.7% rate. The sharp drop in engineering construction is precisely the reason investors are becoming concerned about the health of the Australian economy.
As the mining boom fueled by Chinese demand comes to an end, the Australian economy must find alternative path to growth, and as we've noted many times before, growth could become increasingly difficult given the country's elevated exchange rate and negative terms of trade. Last night, an S&P report noted that while Australia’s AAA rating remained secure for now, the nation faced the prospect of a downgrade if demand from China slowed materially or if the country's housing sector saw a sharp decline in prices.
The Aussie remained under pressure through most of the Asian trading session and finally cracked below the 1.0200 level as European dealing came on line. There is some support at the 1.0150 level, but reported selling by real money accounts and speculative shorts could continue to weigh on AUDUSD. A break below the 1.0150 level could trigger further panic amongst investors and open the path towards a possible test of parity.
Italy Moves for Political Stability; Euro Rallies
Better-than-expected results from the Italian bond auction and an improvement in Eurozone (EZ) consumer confidence readings helped lift the EURUSD in early European trade today, but the rally was capped at the 1.3125 level, as profit taking from Asian traders contained the rally for now.
Italy was able to auction off five- and ten-year bonds, achieving maximum allotment as the auction was heavily oversubscribed. The yield on the ten-year bonds increased to 4.83% from 4.17% the period prior, but this was lower than the 4.90% yield in the cash market prior, thus indicating that the market was willing to assume Italian credit risk despite the political uncertainty surrounding the election results.
Although no effort has yet been made by Pier Luigi Bersani to form a coalition, a spokesman for the upstart candidate, Beppe Grillo, stated that he may weigh support for the Bersani government. The conventional wisdom was that Mr. Bersani and Silvio Berlusconi could form a "national government of unity," which could provide a stable majority in the Italian parliament and create some legislative possibilities. However, it’s clear that Mr. Grillo is now afraid that his protest candidacy efforts will be marginalized unless he makes concerted efforts at compromise, so today's change of tone reflects a more pragmatic stance from all the parties.
Although the cost of financing for Italy has risen, it has not reached anywhere near the crisis levels of 2011 and 2012. With yields on the ten-year bond below the key 5% mark, the credit markets are signaling two messages: 1) Despite the turmoil of unresolved elections, Italy is likely to muddle through with some form of coalition government; and 2) In a world starved for yield, any premium is quickly grabbed by eager investors.
The euro spiked to 1.3122 against the dollar in the immediate aftermath of the auction, but quickly retreated after sellers from Asia swamped the market with offers. For now, EURUSD is consolidating underneath the 1.3100 level, and if the political news out of Italy continues to be promising, the pair could make another run at the 1.3125 highs as the day progresses.
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