The Australian dollar is arguably the best, fundamentally situated currency in the market; and yet it has pulled back significantly from its highs for the year over the past few weeks. Naturally, we would attribute this retracement to a shift in market sentiment; but that would contradict the new highs in equities and commodities. Where are the cracks in the Aussie dollar’s solid fundamental foundation?
Australian Dollar Favored for Growth and Risk Appetite
Fundamental Outlook for Australian Dollar: Bullish
- RBA squashes hawkish rate speculation by saying it doesn’t want to choke growth confidence off “prematurely”
- RBA’s Edey says consumer confidence already returning to high levels
- Breakout potential grows for AUDUSD as pair nears its 2009 highs
The Australian dollar is arguably the best, fundamentally situated currency in the market; and yet it has pulled back significantly from its highs for the year over the past few weeks. Naturally, we would attribute this retracement to a shift in market sentiment; but that would contradict the new highs in equities and commodities. Where are the cracks in the Aussie dollar’s solid fundamental foundation? Is the currency’s correlation to risk slackening or has its economic stability lost its appeal? More than likely, it is mixture of both elements; and over the next two weeks we will know with a little more certainty what is driving the Aussie dollar and whether the currency will finally push forward to revive its bullish trend or turn to a deep retracement.
Over the coming week, both risk appetite and expansion considerations will factor it; but much of this influence will come from outside of Australia’s economic boarders. First up, market sentiment will be fed by the outlook for both the global economy and financial markets to stabilize and grow. It is important to reiterate “stabilize and grow” as indications so far point to a recovery from the worst recession since WWII; but growth beyond returning to positive territory looks feeble through the second half of 2009 and well into 2010. If this is the case, investors may quickly find themselves overextended in the capital markets, seeking a rise in returns that will not develop for some time. Speculation is extremely fickle and prone to violent reversals. Should market participants deem the yield forecasts overblown, the buildup in capital behind risky assets could be quickly unwound as investors look to overweight their portfolios in relatively ‘risk-free’ securities like government debt. Qualifying sentiment will be a series of major GDP releases (including the US, UK and German 2Q figures). While these readings may be second round measurements, the updated component data could significantly alter forecasts for the second half. Outside of pull of these major economic releases, there are any number of unforeseen events that could catalyze risk appetite one way or the other. This weekend’s Jackson Hole Symposium (a collection of some of the most influential policy makers in the world) could produce a warning or outlook that significantly alters the market’s impression of risk and reward.
The Aussie dollar could also be the engineer of its own fate through its own growth and yield potential. There are a few notable economic indicators due over the coming week that will pave the way for key events at the beginning of next month. Notably, we are expecting back to back releases of construction work and business investment for the second quarter. These vital elements to broader growth were among two of the worst performing components of a 2Q GDP number that barely avoided the official moniker of a technical recession. Both are expected to show a market improvement in pace for a measure of activity and credit health. However, the numbers will play a bigger role in standing in a reasonable benchmark for those speculating the following week’s official GDP release. If the economy contracts in the second quarter, it could dramatically deflate the appeal of the Aussie dollar as an outperformer. Otherwise, a sharp improvement could help it to better weather ill-fated turns in risk appetite. What’s more, these numbers will be a lead in to the RBA rate decision (scheduled the same day as the GDP report – on September 1st). In the minutes from its last policy decision, the policy authority said it did not want to ‘prematurely’ choke growth; but then again the Governor has also suggested the benchmark is currently at ‘emergency’ levels. Expect speculation surrounding the Aussie dollar to increase significantly over the next two weeks. - JK
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected].
