- AUD USD curbs its two-week bull trend, threatens to revive larger bear trend
If there is an overwhelming surge or dramatic slump in risk appetite, the Australian dollar will return to its natural state as a high-yield currency when paired against currencies like the US dollar or Japanese yen. However, when the Aussie dollar is set against counterparts that are higher on the yield spectrum or sentiment trends are not particularly aggressive, its standing can come under question. For example, when we look at AUDCAD, we can see the Aussie’s dominance as the ideal investment currencies has softened as the Canadian dollar starts to take the initiative when risk appetite swells while the flow reverses when safety is at a premium. Does this mean the currency with the highest benchmark lending rate and one of the strong economies amongst the majors is turning into a funding currency? No. Yet, depending on how the backdrop for risk and certain economic events develop going forward, the strongest G7 fiat of the past 18 months could find itself under selling pressure.
In the week ahead, the first thing to concern ourselves with is risk appetite trends. Clearly, a general shift towards safety and demand for liquidity will draw foreign capital that was invested in high-return Australian assets back into cash. This is a scenario that is a considerable danger given the event risk that is on the docket and perhaps waiting in the wings. The foreseeable threats to note are this week’s G20 meeting and Friday’s US NFPs report. For the gathering of economic leaders in Toronto; the implications for the Aussie are the possibility that a global policy will be adopted to head off another international financial crisis or there may be a negative reaction to another lost opportunity to sideline what many believe is a growing problem in Europe and the emerging markets. As for the American employment report for Friday, this indicator has a remarkable and renowned influence over investor confidence as it is considered a timely indicator of health for the world’s largest economy.
Off the docket, risk trends are under constant threat of a shift in the situation in the European Union and China. Greece credit swaps are reportedly pointing to a 69 percent probability of a default in the coming years. As debt yields and risk premium rise, financing costs naturally grow. And, considering the regional economy is already slowing and uncertainty has already pushed investors away; another shock to the system could be critical. China and Asian emerging markets are another concern for investors and Aussie traders specifically. The implications of record loan growth from these two economic giants sparking a credit crisis are obvious for international finance; but the further weight such an event on economic activity in these regions would further depress demand for Australia’s exports.
From gauging the health of everyone else, we bring it back the Aussie dollar. Interest rate expectations for the coming 12 months are forecasting a measly 19 basis points worth of hikes. At the same time, economic activity in the economy has shown signs of, if not flagging, then at least leveling off. This makes the Australian currency especially exposed to alternatives like the Canadian and New Zealand dollars that are looking at a young economic recovery and high interest rate expectations. To further develop a feeling for the health of the Australian economy, we have a few economic indicators are of note. Retail sales will measure domestic demand as will manufacturing activity (which further has implications for exports activity). Housing data and private credit are also interesting for measuring consumers’ and businesses’ reaction to the RBA’s string of rate hikes this past year
