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Absent Docket Leaves Aussie Susceptible to Risk Trends

Absent Docket Leaves Aussie Susceptible to Risk Trends

2012-06-22 23:00:00
Christopher Vecchio, CFA, Senior Strategist
Share:
Absent_Docket_Leaves_Aussie_Susceptible_to_Risk_Trends_body_Picture_5.png, Absent Docket Leaves Aussie Susceptible to Risk Trends

Fundamental Forecast for Australian Dollar: Neutral

The Australian Dollar had a relatively strong week, finishing as the second best performer against the US Dollar just behind its Asian-Oceanic counterpart, the New Zealand Dollar. The AUDUSD appreciated by 0.13 percent since last Friday, with the majority of its gains taken back on Thursday, when it slid nearly 2 percent alongside the Euro and US equity markets. Indeed, the Aussie’s prospects are looking weaker once again, especially in light of some additional disappointing Chinese data and the Federal Reserve’s decision to not implement a massive liquidity program; hope for a Chinese fiscal stimulus package and a Fed stimulus package were two of the main drivers behind the Australian Dollar the past few weeks.

In terms of data on the docket ahead, not much is due by way of critical data out of Australia. With that said, there’s one event we’re keeping our eyes on. On Thursday, the HIA New Home Sales report for May is due, and while no forecast has been provided, we can report on the recent trend. But the trend has not been merely up or down; it’s been violently up or down. In April the HIA Home Sales report showed growth of 6.9 percent, but that came after March’s 9.4 percent contraction. Before the dismal March figure, the report showed that sales grew by 3.0 percent in February, but that was only after a 7.4 percent contraction in January. So, if the trend sticks, the HIA report should show some weakness this time around. However, in light of stronger than expected growth figures and a rapidly expanding labor market, perhaps there are some buffers in place that might have kept sales supported in May.

Aside from the one data release (there’s not much by way of Chinese data either), we expect the Australian Dollar to trade largely in line with risk-correlated assets. The AUDUSD has tracked the S&P 500 closely the past few weeks, sharing a +0.92 daily correlation since June 1, 2012. With equity markets expected to remain under pressure now that the Federal Reserve has made it clear that it will take a material downturn in the US economy to force another round of easing, we expect high beta currencies and risk-correlated assets to sell-off, at least in favor of a stronger US Dollar.

-CV

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