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Australian Dollar Pressured Lower as Risky Assets Resume Decline

Australian Dollar Pressured Lower as Risky Assets Resume Decline

2011-03-19 03:49:00
Ilya Spivak, Sr. Currency Strategist
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Australian_Dollar_Pressured_Lower_as_Risky_Assets_Resume_Decline_body_TOF_03182011_AUD.png, Australian Dollar Pressured Lower as Risky Assets Resume Decline

Fundamental Forecast for Australian Dollar: Bearish

The Australian Dollar remains firmly anchored to underlying trends in investors’ sentiment, with short-term correlation readings gauging the link between AUDUSD and the MSCI World Stock Index, a proxy for risk appetite, holding at the strong end of the spectrum. This foreshadows a volatile week ahead but ultimately hints the path of least resistance favors Aussie weakness as sentiment continues to face downward pressure from lingering uncertainty on multiple key issues.

First, the G7 intervention into the Japanese Yen produced a knee-jerk burst of optimism but the underlying issues present in the aftermath of the Tohoku earthquake remain unresolved. Casualties continue to mount, the extent of the damage and cost of reconstruction remains uncertain, and the threat of disaster at the Fukushima Daiichi nuclear power plant continues to linger.

Meanwhile, a new phase of the Libyan crisis began to unfold as the UN Security Council authorized the establishment of a no-fly zone and gave its member countries a virtually blank check to apply force to “protect citizens”, approving just about anything shy of outright occupation. As we have noted previously, markets see the situation in the North African country as a trial run for the worst case scenario in the aftermath of a protest flare-up, so the path chosen by the major powers from here (whether that is to materially intervene or not) will be weighed up as if it were happening to a far more significant crude supplier than Libya itself (i.e. Saudi Arabia). Increasingly intense unrest in Bahrain and Yemen further complicate the geopolitical landscape.

Finally, Friday will bring the much-anticipated summit of Euro Zone finance ministers that has been widely expected to produce a so-called “grand bargain” on dealing with the debt crisis on the currency bloc’s periphery. As we discussed in detail last week, the preliminary outlines of the scheme amounted to nominal progress but fell woefully short of a true bulwark against further sovereign stress, pointing to a wave of disappointed selling across the spectrum of risky assets if the final version is not substantially strengthened.

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