Aussie dollar finds form despite declining risk trends

Global markets kicked off the week in the same unspectacular fashion as they ended, with investors remaining reluctant to carry risk assets higher. There’s a degree of concern surrounding forthcoming third-quarter earnings, prompting investors to take a neutral stance ahead of earnings from industry heavyweights this week such as Alcoa Inc, JPMorgan Chase & Co and Well Fargo.

Markets are also keeping a close eye on Europe’s elite this week with a meeting of Finance Ministers in Luxembourg overnight, coinciding with the official launch of the European Stability Mechanism. Spanish PM Mariano Rajoy and French President Francois Hollande will also meet on Wednesday, and German Chancellor Angela Merkel will visit Greece this week, the first visit since Greece’s economic turmoil took a turn for the worst in 2009. Meanwhile, conjecture surrounding the likelihood of a Spanish bailout remains a key theme. At last week’s ECB press conference, Draghi made it abundantly clear the ball is firmly in Spain’s court, stating, “We are ready to activate bond purchases and we have a fully effective backstop. Now it’s in the hands of governments.” In short this means before qualifying for the ECB’s Outright Monetary Transactions (OMT’s), a country such as Spain will firstly be required to seek financial aid and abide by an agreed set of conditions. While a “full macroeconomic adjustment program” (à la Greece, Portugal and Ireland) may not be required, countries such as Spain are encouraged to take a watered down version of a bailout, or a “precautionary program.” This program may carry less stringent measures allowing a country to retain a larger degree of autonomy.

Also of concern was the latest forecasts from the World Bank which cut growth expectations in East Asian and the Pacific. The Bank expects growth to slow from 8.2 percent in 2011 to 7.2 percent this year, before edging higher to 7.6 percent in 2013. The report also noted weaker exports and lower investment growth will slice 1.6 percent from China’s bottom line in 2012, with GDP expected to fall from 9.3 percent in 2011 to 7.7 percent in 2012. Growth in the region is expected to bounce back to 8.1 percent in 2013, with policy easing and central bank stimulus expected to reverse the trend.

Nevertheless, yesterday’s HSBC PMI compiled by Markit economics signaled tentative signs of expansion in business activity during September. The headline Services PMI index increased to 54.3 in September up from an index level of 52 in August, the fastest pace since May. The Composite Output Index (covering both manufacturing and services) rose to 50.3 in September, up from 49.9 in August. The finer points of the release show the rise was underpinned by growth in services based output, with manufacturing firms continuing to report a decline in new orders. According to the release, the improvements seen across service related industry was - in part - attributed to increased domestic consumption in the lead up to the Golden Week Holiday. China’s services sector accounts for around 43 percent of GDP. The next key directive from China will be Thursday’s release of new Yuan Loan activity which is expected to settle lower to 680 billion Yuan in September, from 703.9 billion in August. Considered a critical barometer of domestic demand, this release will be viewed as a precursor to fourth-quarter growth.

Across currencies, the Euro begun to show signs of strain with a moderate risk-off environment from both sides of the Atlantic encouraging a move back below $US1.30. The greenback remained the target of selected safe-haven buying with moderate gains again the Euro and Sterling. The Yen however remain the safe-haven of least resistance with the USDJPYpair moving deeper within the 78-handle.

After last week’s slide, the Aussie dollar began to show signs of composure with a break to the upside of 102-figure overnight, before softening towards the US close. Although the local unit failed to hold gains throughout the session, we’re seeing bid’s begin to surface once again, suggesting last week’s sell-off was somewhat overstated. The day ahead will see the release of the NAB Business Conditions/Confidence survey with RBA Deputy Governor Philip Lowe scheduled to speak in Tasmania. In his speech entitled ‘The labour Market, Structural Change and Recent Economic Developments,’ markets will no doubt be listening closely in an effort to get a sneak peak ahead of Novembers Melbourne cup day decision.