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Australian Dollar Tracks Gold Prices, Short-Term Risks Favor Gains

Australian Dollar Tracks Gold Prices, Short-Term Risks Favor Gains

2011-05-20 22:30:00
David Rodriguez, Head of Business Development
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The Australian Dollar AU$

AUD/USD NY Spot Close 1.06646

Australian_Dollar_Tracks_Gold_Prices_Short-Term_Risks_Favor_Gains_body_audusd_risk.png, Australian Dollar Tracks Gold Prices, Short-Term Risks Favor Gains

Australian Dollar Tracks Gold Prices, Short-Term Risks Favor Gains

Fundamental Forecast for Australian Dollar: Bullish

The Australian Dollar finished the week higher against its US namesake, fueled by similar strength in highly-correlated gold prices and modest improvements in financial market risk sentiment. A relatively empty Australian economic calendar meant the Aussie currency traded almost exclusively off of broader moves across commodities and other asset classes. The only real exception came on modest AUD bounce following the Reserve Bank of Australia’s minutes from their most recent meeting. A similarly empty domestic calendar in the week ahead leaves the Aussie dollar to trade off of moves in broader financial markets.

The Australian Dollar’s correlations to Gold prices and the US S&P 500 trade near record highs, keeping focus squarely on broader market swings. On the fundamental side of things, Reserve Bank of Australia officials struck a hawkish tone in their minutes from their May meeting, claiming higher interest rates were likely but the timing was unclear. Though minutes show concerns over divergences across different sectors of the Australian economy, higher rates “were likely to be required at some point if inflation was to remain consistent with the medium-term target.” Overnight Index Swaps show expectations that the Australian Dollar will maintain a substantial interest rate advantage over major counterparts through the foreseeable future. All else remaining equal, robust rate advantages support further Aussie Dollar strength.

Of course, financial market conditions are constantly shifting and all else is never equal. It remains critical to watch moves in gold prices as well as broader financial market ‘risk’ as correlations trade near record strength. Spot gold prices broke out of a short-term consolidation pattern through late Friday trade, while the US S&P 500 has shown resilience at range lows. Short-term momentum favors AUD gains, but markets remain exceedingly choppy. It will be important to see what happens through Sunday’s market open. -DR

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