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Australian Dollar Volatility to Continue on China, Jobs Data

Australian Dollar Volatility to Continue on China, Jobs Data

2016-01-09 01:20:00
Ilya Spivak, Head Strategist, APAC
Australian Dollar Volatility to Continue on China, Jobs DataAustralian Dollar Volatility to Continue on China, Jobs Data

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar Continues to Face China-Driven Risk Aversion Threat
  • Upbeat Jobs Data May Trim RBA Rate Cut Outlook, Cap Aussie Losses
  • Find Critical Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar succumbed to broad-based risk aversion last week, dropping the most in over four years against its US counterpart. China appeared to be the epicenter of negativity as policymakers attempted to implement a new circuit-breaker system for limiting stock-market volatility. The setup envisioned pausing trade for 15 minutes if shares sustained a loss of 5 percent and stopping it altogether at a loss of 7 percent.

Sharp intraday swings are not unusual for Chinese stocks, where trading is dominated by retail speculators with a focus on the short term. Circuit-breakers proved counter-intuitive in this environment, exerting a kind of magnetism on prices. If an intraday downswing begins to approach the first 5 percent threshold, investors rush to sell before the shut-down, which only accelerates the selloff. Those that missed out are then anxiously waiting to liquidate once trade resumes, making for a swift slide to the cut-off at 7 percent.

The dour mood deepened as China weakened the Yuan by the most since Augusts’ dramatic restructuring of the daily fix regime for the onshore exchange rate. The profile of Chinese market participants turned this into a negative catalyst despite its would-be stimulative implications. Devaluation eroded purchasing power of imported goods and services. This may have forced punters in Chinese shares to divert “play money” out of trading accounts and toward everyday expenses.

Spillover from Chinese turmoil into the broader markets appears to be driven by fears of instability in the world’s second-largest economy. This seems to be coupled with a general tendency toward risk aversion as the Fed begins to tighten monetary policy even as global growth decelerates. More of the same may be on tap as prior restrictions on large sellers lapse going into next week. Circuit-breakers have been suspected for now but large downturns may still spoil sentiment, sending the Aussie lower alongside global equities.

On the domestic front, Employment data will be in focus. The economy is expected to have lost 10k jobs in December, marking the first drawdown in three months. The unemployment rate is seen ticking higher to 5.9 percent. Australian news-flow has increasingly improved relative to consensus forecasts over the past two months, hinting analysts’ models are understating the economy’s vigor and opening the door for an upside surprise. Such an outcome may weigh against RBA rate cut speculation and boost the Aussie.

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