It is no stretch to say that risk appetite has ushered the Australian dollar to eight month highs against the its US counterpart. However, it is essential to realize that this correlation to sentiment has produced far more restrained appreciation against many of the commodity currency’s other major counterparts.
Australian Dollar’s Strength Hinges on GDP and RBA Decision
Fundamental Outlook for Australian Dollar: Bullish
- First quarter capital investment and construction activity hint at a deeper contraction in 1Q GDP
- Leading Index indicators point to a positive turn in growth beginning in March
- Questions over US and New Zealand sovereign debt ratings put Australia in a positive contrast
It is no stretch to say that risk appetite has ushered the Australian dollar to eight month highs against the its US counterpart. However, it is essential to realize that this correlation to sentiment has produced far more restrained appreciation against many of the commodity currency’s other major counterparts. In fact, against the New Zealand and Canadian dollars, the Aussie unit has actually lost ground. And; when measured against the franc, euro and pound, the progress was limited. This suggests there are perhaps doubts as to this currency’s relatively strong pace of growth and/or the stability of its sizable yield advantage. If this is the case, the market’s doubts will either be confirmed or banished by key event risk over the coming week.
The fundamental fireworks begin early Tuesday morning in Sydney with the RBA’s rate decision. One of the Australian dollar’s primary benefits in the currency market is its exceptionally high rate of return. With a benchmark at 3.00 percent, capital naturally flocks from the economies with a near-zero rate (including the US, UK, Canada and Japan) into the land down under. It doesn’t hurt that the financial troubles the economy has seen through the global crisis have been comparatively minor and its own economic slump has been surprisingly light. However, speculators have been burned by such attractions before – and recently. The same appeal was seen the British pound just a year ago when the benchmark was at 5 percent and the worst of the credit crunch seemed to still be concentrated in the US. The same could be said about the euro which until six months ago was committing itself to price stability. Is the Australian dollar destined to the same fate? That depends on how long the global financial and economic slump can last. In the meantime though, traders need some sign that Australia will indeed maintain its yield advantage while the global market works itself out. This is the critical point for the policy decision. The consensus among economists is for a hold and the interest markets are in the same boat. Should they indeed pass, it will buy more time towards the eventual recovery, thereby maintaining the yield advantage and boosting expectations for a quicker return to hikes.
Central bank Governor Glenn Stevens and his fellow policy officials wouldn’t be able to even consider holding back on easing monetary policy – much less contemplate the eventual turn – if it weren’t for an economy that has been able to avoid the worst of a global recession. Just how well has the world’s smallest continent been able to weather the storm? We will find out Wednesday morning with the release of the first quarter GDP numbers. These figures may seem to be lagging their US, European and Japanese counterparts; but that is because they are fully tallied before release and therefore do not require significant revisions. Over the final three months of 2008, the economy reported its first contraction in growth in eight years. However, Australia has yet to see its first official recession (which we will use the loose definition of two consecutive quarters of negative growth) in over 17 years. That is expected to change with a follow 0.2 percent dip through the first quarter of this year. This seems a likely outcome considering the pace of employment, consumer spending, lending, housing, factory and service sector activity over the past six months. However, even a contraction could be considered a positive outcome as it is exceedingly modest compared to nearly everyone of its industrialized counterparts. At the same time, each fraction of a percentage point greater the actual figure is over the consensus, the more good will for the Australian dollar will be chipped away. - JK
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at ([email protected])