There are different grades of risk appetite sensitivity. Currencies like the euro and pound have shown a positive correlation to such trends; but when sentiment is not pushing an extreme, this dynamic begins to break down. The same is not true for the Australian dollar.
[B]Australian Dollar Needs Risk Appetite to Sustain its Drive[/B]
[B]Fundamental Outlook for Australian Dollar: [/B][B]Bullish[/B]
- National payrolls shrink less than expected, though the jobless rate still hits a five-year high
- Consumer confidence hits a 22 year high while business sentiment peaks at a 15-month record
- Will the AUDUSD’s three-month trend channel continue or falter next week?
There are different grades of risk appetite sensitivity. Currencies like the euro and pound have shown a positive correlation to such trends; but when sentiment is not pushing an extreme, this dynamic begins to break down. The same is not true for the Australian dollar. Despite the hesitation and congestion that has developed among many of the other US dollar and yen-based crosses, the Aussie currency was once again pitched into a considerable rally against most of its major counterparts. While positive data claim some responsibility for the appreciation, demand for yield was the primary source of unit’s primary source of strength as forecasts for economic recovery and financial stability appealed to the bullish convictions that have swayed the crowds for nearly three months now. However, without fundamental confirmation for this optimism, risk appetite will eventually falter. How will market sentiment fair next week; and will the Aussie dollar maintain its connection?
AUDUSD is one of most attuned barometers for risk appetite the currency market has. The Australian dollar is backed by one of the highest yields among the G10 currencies and an economy that has staved off recession while rest of the world suffers a debilitating recession. On the other side of the pair, the US dollar is flirting with a zero-interest rate policy while struggling with a ballooning deficit and slow to turn recession. Turning to the week ahead, there seem to be few, critical market events that can catalyze market-wide sentiment on reputation alone. One particularly promising trigger for volatility however is the G8 meeting that takes place over the immediate weekend. The meeting has already started and some commentary has already been issued on an unofficial basis. Canadian Finance Minister Flaherty has said there is ‘comfort’ among the officials present that the a global recovery is underway. On the other hand, ‘officials’ latter said the general consensus was that the outlook had improved little if at all since the April gathering. More pressing are allusions to government exit strategies. As market participants and economists take note of the rebound in activity; they have grown more critical of officials plans to curb ballooning budget deficits and facility a recovery. It has been suggested that tactics will be discussed and released in the official communiqué; but the likelihood of receiving details or a workable time table is very low.
For domestic sources of volatility, there are a number of indicators that could draw the markets interest. Interest in monetary policy will place the spotlight on the minutes from the RBA’s monetary policy meeting at the beginning of this month. The Board held rates unchanged at 3.00 percent on June 2nd for a second consecutive month before the first quarter GDP reading confirmed the economy avoided its first recession since 1991. This provides scope for further cuts later down the line should they be needed – cuts that could actually have an impact on growth and market health (unlike further easing in the US and UK among other). Assessments and forecasts for growth and financial conditions will be key. The other notable event risk comes in the former of quarter sector analysis. The first quarter dwelling starts report is lagging; but it is one of the few official measures of the vital sector to be released. In contrast the Westpac-ACCI survey of industrial trends for the second quarter is proprietary; but such a disadvantage will be compensated for through its timeliness on gauging strength in a region of growth that can define employment, capital investment and trade in one fell swoop. Ultimately however, these indicators will likely be good only for short-term volatility and will be then absorbed into the long-term forecasts for growth. – JK