Australian Dollar At Risk as Investors Weigh Outlook For Future Policy
Fundamental Outlook for Australian Dollar: Bearish
- Australian Lending to the Private Sector Unexpectedly Fell in May
- Retail Sales Top Expectations But Outlook Remains Uncertain
- Trade Deficit Widens Five Times More Than Expected on Coal, Iron Ore Sales
- Service Sector Expands For The First in 15 Months in June, Says AiG
Australian dollar volatility looks likely in the week ahead the currency is pulled in opposing directions by an interest rate decision from the Reserve Bank of Australia and a building downward reversal in risk appetite across financial markets. Risky assets look increasingly likely to reverse lower: relative to earnings, the MSCI World Stock Index ended June trading at the highest level since August 2004. In real terms, the world economy grew at an average pace of 4.1% that year, whereas virtually every credible forecasting outlet including the IMF, OECD, World Bank, and assorted central banks all call for global GDP to shrink this year. This suggests stock markets are highly overvalued, pointing to a forthcoming correction downward as the euphoria that began in March subsides. Technical positioning suggests this may happen sooner rather than later, with the Dow Jones Industrial Average showing a well-defined Head-and-Shoulders topping formation. A trade-weighted index tracking the Australian Dollar’s average value against top global currencies is now 95.4% correlated with the Dow and 98.2% correlated with the broader MSCI metric (using a 90-day rolling correlation), suggesting that any major selloff in risky assets put tremendous downward pressure on the Aussie.
On the other side of the coin, the Reserve Bank of Australia may offer support to the larger antipodean currency as Glenn Stevens and company keep interest rates unchanged at 3% for the third consecutive month. Economic data has been coming in relatively better in recent weeks and a handful of upside surprises in Chinese manufacturing statistics will allow the RBA to once again repeat a familiar mantra of a forthcoming rebound in export demand as well as confidence in the fiscal and monetary stimulus measures that have already been put in place. While none of this is generally false, the real question going forward is whether the economy can maintain momentum after the flow of government cash dries up. The RBA knows this, and has been keen about dropping hints of potential further easing in the months ahead if such actions are deemed necessary. As has been shrewdly pointed out by Bill Evans, chief economist of Australian bank giant Westpac, interest rate reductions have a confidence-boosting quality and the RBA may be making a strategic decision to hold off on easing for now to get the most bang for their buck when the economy begins to markedly deteriorate again. In any case, a “no-change” outcome this time around may offer near-term support to the Aussie, helping to cushion (if only temporarily) some of the damage from a reversal in risky assets.
Elsewhere on the economic calendar, Westpac Consumer Confidence and Consumer Inflation Expectations figures may tick higher on the aforementioned boost from the government’s actions, but the releases are unlikely to stir much of a positive response considering the forces behind them have had ample time to be priced into the exchange rate and given a backdrop of rising unemployment. Indeed, the economy is expected to shed 20k jobs in June, sending the unemployment rate to a 6-year high at 5.9%. Investment lending is likely to fall in May considering private sector credit fell at the fastest pace in over 15 years during the same period. - IS
