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Australian Dollar May Weaken Further on Renewed Risk Aversion

Australian Dollar May Weaken Further on Renewed Risk Aversion

2014-02-22 02:02:00
Ilya Spivak, Head Strategist, APAC
Share:
Australian_Dollar_May_Weaken_Further_on_Renewed_Risk_Aversion__body_Picture_1.png, Australian Dollar May Weaken Further on Renewed Risk Aversion

Fundamental Forecast for Australian Dollar: Bearish

  • Australian Dollar Snaps 3-Week Win Streak on Soft Chinese News-Flow
  • Risk Aversion to Return on Fed QE Bets, Global Growth Slowdown Fears
  • Help Time Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar declined as expected last week and we continue to hold a short AUD/USD position from 0.90, looking for further weakness. As we discussed previously, the Aussie’s resilience in early February appeared to reflect a broad-based recovery in risk appetite traced out as panic linked to a range of emerging-market jitters began to subside. We expected this to allow investors to refocus on big-picture considerations. This threatened to pull the Aussie lower amid renewed erosion in risk appetite as investors considered the implications of Fed stimulus reduction against a backdrop of increasingly disappointing G10 economic news-flow.

Worrisome outcomes on the data front continued to pour in last week, with a Citigroup gauge tracking the performance of G10 releases relative to expectations sinking to the lowest level in eight months. Meanwhile, rhetoric supportive of stimulus reduction emerged from a host of sources including a round-up of Fed speakers, a firm set of minutes from January’s FOMC meeting and even the draft communiqué from the weekend’s G20 meeting. While this helped end the eight-day run of consecutive gains for the S&P 500, a meaningful reversal in risk appetite failed to materialize.

Rather, AUD weakness emerged from domestic catalysts as unexpectedly soft Chinese data undermined RBA policy expectations. February’s Manufacturing PMIreport from HSBC showed factory-sector activity contracted at the fastest pace in seven months. China is Australia’s largest trading partner and slowing performance there bodes ill for demand prospects in the latter country’s pivotal mining sector. This weighed against interest rate hike probabilities, with an index tracking traders’ priced-in RBA outlook edging to a two-week low.

Looking ahead, a lull in significant event risk on the domestic front brings the spotlight back to macro-level catalysts and Fed policy considerations. The dynamics at work remain largely unchanged, with another busy week of “Fed-speak” including testimony from Chair Yellen likely to talk up QE cutback continuity. A variety of activity indicators from regional Fed branches as well as reports tracking housing, consumer confidence and durable goods orders are also on tap.

Steady underperformance relative to median forecasts on US economic outcomes hints analysts continue to underestimate the severity of the slowdown in the world’s largest economy, opening the door for another round of downside surprises. Where last week the toxic mix of Fed stimulus withdrawal and mounting growth concerns marked a break in sentiment’s recovery, the same dynamic this time around may tip the scales toward risk aversion, amplifying downward pressure on the Aussie. -IS

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