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Australian Dollar Should Remain Heavy On Global Risk Aversion

Australian Dollar Should Remain Heavy On Global Risk Aversion

David Cottle, Analyst


Fundamental Australian Dollar Forecast: Bearish

  • The Australian Dollar is close to six-week lows against its US big brother
  • This can look a bit odd given that the Australian economy is in reasonable shape
  • But the Aussie is a ‘risk asset’ and that means it’s got a few problems now

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The Australian Dollar spend last week at the mercy of broader global economic sentiment and it’s all-too likely to remain there in the coming sessions even though they will offer Australia-watchers a wealth of economic cues.

Fairly or not periods of global risk aversion and market volatility tend to weigh on the Aussie. It’s firmly classed as an asset with a strong correlation to global growth, along with equity. That being so it’s probably not surprising that we should find it close to six-week lows against its American cousin after a week which saw equity markets worldwide under some strain.

It’s not easy to say exactly what caused investors’ sudden rethink about an asset class which previously seemed so well supported. There are any number of possible candidates; fear of rising US interest rates, the possibly re-emergence of inflation or worries that stock valuations were getting ahead of likely reality. Take your pick.

But stocks were pressured and, as a ‘risk asset’ the Aussie was too.

This can sometimes seem a little harsh because the Australian economy is doing reasonably well. The Reserve Bank of Australia evinced cautious optimism when it held interest rates at their record lows last week and, subsequently, in its quarterly policy statement. Business confidence is up, employment levels are rising and even long-dormant consumers are starting to fizz. Wage growth and inflation remain perhaps puzzlingly low, as they do in many other developed economies. Were they to pick up its unlikely that higher Australian interest rates would remain the distant prospect they now are.

The coming week will offer another look at sentiment among both businesses and consumers. There could be some short-term gains for the Australian Dollar if both remain cheerful.

However, the currency is more likely to remain vulnerable to risk appetite well beyond its home country’s shores. If investors start to feel that equity has suffered enough then it and other risk assets- including the Aussie, can probably look forward to some consolidation and perhaps some gains. That said it’s very difficult to predict when waves of selling pressure might hit those global equity markets

All up the Australian Dollar seems to struggling against a resurgent greenback and it’s hard to see anything happening this week which will move that dial too far. It’s a bearish call this week, but one made with the imponderables of world risk appetite firmly in mind.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or us the Comments section below to get in touch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.