Last week, risk appetite soared while the demand for economic stability was simultaneously leveraged by credit rating fears. Few currencies flourish under these normally dichotomous conditions; but the Australian dollar was one of them. With positive growth expected to return well before other major economies and enviable interest rates, the Aussie dollar is proving to be one of the most fundamentally-sound currencies in the currency market. However, can these trends sustain themselves? What’s more, are there any pitfalls that this high-flyer could eventually succumb to?
Australian Dollar Rides On Demand For Yield And Economic Strength
Fundamental Outlook for Australian Dollar: Bullish
- RBA Stevens forecasts a rebound for Australia before the year’s end
- Consumer confidence slumps 4.3 percent, drawing a quick end to a rebound in confidence
- Has AUDUSD cleared resistance? Take a look at the technical forecast for next week.
Last week, risk appetite soared while the demand for economic stability was simultaneously leveraged by credit rating fears. Few currencies flourish under these normally dichotomous conditions; but the Australian dollar was one of them. With positive growth expected to return well before other major economies and enviable interest rates, the Aussie dollar is proving to be one of the most fundamentally-sound currencies in the currency market. However, can these trends sustain themselves? What’s more, are there any pitfalls that this high-flyer could eventually succumb to?
Optimism is the single greatest advantage the Australian dollar has; but forecasting market sentiment over the coming week is difficult. Making things especially thorny, Monday is a market holiday for the US, UK and New Zealand. This will deprive the Forex market of significant liquidity and could very well elicit extraordinary volatility or start us off with a false move that is immediately reversed when the market is back up to full capacity. Beyond the abnormal trading conditions through the beginning of the week; investors will be put back onto the same themes that have dominated headlines for the past few months. However, it may be too early to be putting so much stock in growth forecasts, positive earnings and the return of speculative capital. Japan marked a record contraction in its recent first quarter revision, the UK confirmed it is sporting its worst slump in over half a century and the US is scheduled to release its first revision next week. Speculation is certainly attuned to future returns; but how promising can the outlook be when the first signs of growth aren’t expected until the turn of the year? What’s more, the foundation to financials stability and growing returns is largely due to government intervention. Liquidity injections, bailouts, toxic debt purchases and other actions taken by central banks around the world will have to eventually be unwound. When the banks are forced to move their illiquid asset-backed derivatives back onto their books and repay their capital buffers, we will seen whether the market can stand on its own two feet.
We have taken stock of the factors for general sentiment going forward; but how does the Australian dollar stack up (regardless of whether risk appetite is on the rise or retreat)? Considering the upbeat assessments for the economy both the Australian Treasury Secretary and Reserve Bank of Australia Governor offered this past week, the Aussie dollar is ahead of the pack. However, these public officials have to be cheerleaders of their economies; and being the outperformer has amplified more than one currency’s plunge when things began to fall apart. Taking in the economic releases due this week, there is scope for short-term volatility and a modest shift in growth forecasts. The Westpac and Conference Board leading composite indicators hold little influence among economists; but credit numbers, home sales and quarterly readings for business investment and construction activity have real bearing on the future. However, the mere presence of the first quarter GDP number, current account balance and RBA rate decision the following week will likely dampen any trends that try to set their roots in traditional fundamentals. - JK
Written by: John Kicklighter, Currency Strategist for DailyFX.com
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