Australian Dollar Outlook Hinges on Trend in Risky Assets

The Australian Dollar looks likely to succumb to heavy selling pressure if risk appetite dissipates across financial markets, weighing on the high-yielding currency.

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[B]Australian Dollar Outlook Hinges on Trend in Risky Assets[/B][/B]

[B]Fundamental Forecast for Australian Dollar: [/B][B]Bearish[/B]

The Australian Dollar looks likely to succumb to heavy selling pressure if risk appetite dissipates across financial markets, weighing on the high-yielding currency. The MSCI World Stock Index has bounced sharply lower from resistance marked by the upper boundary of a falling channel that has contained prices since October of last year. The Australian unit’s average value against a trade-weighted basket of top currencies is now 93.7% correlated with the MSCI metric, suggesting a fallout across global stock markets will bring the Aussie along for the ride. Some upside risk does remain, however, on the heels of cautiously optimistic rhetoric from the G7 summit in Washington, DC.

The economic calendar is generally uneventful, with most data releases reflecting themes that are likely already priced into the exchange rate. HIA New Home Sales are likely to move lower in March considering vehicle sales fell at the fastest pace in 9 years during the same period, reflecting Australian consumers’ continued hesitation to commit to big-ticket purchases. This seems logical considering the deepening economic downturn has pushed the unemployment rate to a 5-year high of 5.7%, weighing on disposable incomes, while access to borrowing has dwindled to unprecedented levels. Indeed, growth in Private Sector Credit has trended sharply lower since the beginning of last year and is expected to print at a record-low 0.3% in the year to March. Preliminary monthly readings of NAB Business Confidence the first-quarter result will probably mark a bit of an improvement from the three months to December 2008, the metric is likely to remain in contractionary territory. Indeed, NAB chief economist Alan Oster remained cautious after seeing an uptick in the March result, saying, “While an element of fear appears to be abating, the index is still quite low [and] points to falling demand in the first quarter.” February’s Conference Board’s Leading Index is unlikely to command much attention considering traders have already seen an analogous metric from the Westpac Banking Corp fall to record lows in the same period to signal a recession, a notion that has been confirmed by the central bank’s Governor Glenn Stevens.