The Australian dollar (AUD) is probably the best proxy for risk appetite in the forex market as it is one of the most heavily carry-traded pairs because of the high interest rate in Australia. One of the other reasons is because the Aussie dollar is also a de-facto proxy of Chinese growth as China is the largest importer of Australian goods and raw materials.
This week is interesting as there is not a lot of news here in the US, but there is a lot of economic data expected from China. This morning, Chinese trade balance figures came in much better than expected so the risk-on trade carried global stocks higher. But if we look a little deeper into the numbers, the Chinese trade surplus increased because imports decreased. This is potentially bad for Australia despite the fact that China is growing.
There is no economic data of significance due out for Australia this week so the market response to the Chinese data should drive the value of the Aussie, led by Chinese CPI and GDP data.
As you can see from the chart below, 1.04 has acted as resistance in the past so I’m am looking at that resistance to hold on the first attempt to break through, however it may re-approach and eclipse that level if the data should come in better than expected. So the play is to be short AUD/USD just ahead of 1.04 looking for resistance to hold, with the ability to reverse the position should it go down to 1.0275 with an expectation that it will re-test 1.04 at some point soon.
The loonie (1.0126) has been doing what’s expected of her when there is no domestic interest involved and that is move on innuendo and little volume. Big picture, the currency is performing rather well despite being put under pressure from a shift in risk assets and as oil prices appear to be technically retreating from recent highs. The currency continues to outperform the other commodity and risk sensitive assets. This mornings Bund issuance, a German January 2022 Bund bid-to-cover ratio of 1.3 for EUR+5.14b and Euro PMI has the EUR on the back foot, confirming in black and white that the EU zone is heading for a recession, assuming that the first quarter will also be in contraction.
The global investor is consistently worried about Euro refinancing. Italy, the recent focus of the crisis, must borrow to cover €53b in expiring debt in the first quarter alone in a series of debt auctions beginning next week. The CAD had started this year on a constructive note yesterday, climbing to its strongest level against its larger neighbor and biggest trading partner, the US, in nearly four-weeks, as rising oil prices and stronger than expected global economic data encouraged investor risk appetite. A day later and the markets are able to give back all and then some, allowing the loonie to wallow in a non constructive trading range. Investor’s interests seem to be elsewhere.
In truth, traders are looking to North American employment data this Friday for reassurance the US will be able to avoid slipping back into recession. The market expects that the US economy will been able to crank out about +140k jobs during December, up from +120k in November and an unemployment rate to edge up a tick to +8.7%. In Canada, many are just hoping for a positive print (+15.3k and unemployment rate of +7.4%), in contrast to last months surprisingly poor return (-18.6k). Before then we will have CAD Ivey PMI (57.5) and ISM non-manufacturing PMI to contend with. For now expect the market to play the percentages and recent range until they can get some fundamental guidance to “hang their hat on”.
Loonie
Tomorrow is the rate policy meeting decision Down Under and market expectations are for a possible 25 bp rate reduction. However, inflation metrics have been moving higher and the Australian economy has been chugging along despite the problems in the Euro zone that could lead to a global recession.
Looking at the chart below, the Aussie (AUD) has been gaining steadily, especially after last week’s swap line reduction to try to provide liquidity to the global banking system. Were it not for the Euro zone crisis, global appetite for risk would be much higher and the Aussie would stand to benefit.
The RBA has been known to take a wait and see approach to rate-setting so perhaps this will be a time when they may do the same. There is good support for the AUD/USD pair at 1.0230 so a non-action by the RBA makes for a good trade that could produce a 2:1 reward/risk.
Therefore, the target for the Aussie is at 1.0425, using a stop just below support at 1.0230.
Tomorrow is the rate policy meeting decision Down Under and market expectations are for a possible 25 bp rate reduction. However, inflation metrics have been moving higher and the Australian economy has been chugging along despite the problems in the Euro zone that could lead to a global recession.
Looking at the chart below, the Aussie (AUD) has been gaining steadily, especially after last week’s swap line reduction to try to provide liquidity to the global banking system. Were it not for the Euro zone crisis, global appetite for risk would be much higher and the Aussie would stand to benefit.
The RBA has been known to take a wait and see approach to rate-setting so perhaps this will be a time when they may do the same. There is good support for the AUD/USD pair at 1.0230 so a non-action by the RBA makes for a good trade that could produce a 2:1 reward/risk.
Therefore, the target for the Aussie is at 1.0425, using a stop just below support at 1.0230.
The Australian dollar “Aussie” has moved back to parity with USD in a sign of things to come. The markets have been on edge for some time due to the Euro debt crisis but are looking for a “Santa Claus” rally into the close of the year. With the EU Finance Minister meeting taking place today, confidence could be restored quickly.
One thing to consider though when looking at the Aussie is that they are closely tied to China economically and raw materials, which they export. As commodity inflation continues to rise, the Aussie dollar will benefit.
While everyone Central banker around the globe will shout that inflation is not a problem, commodity prices tell a different story. So the Aussie dollar looks poised to rise further , as carry traders buy Aussies for the interest they receive on the “hidden inflation story”.
Potential price target of 1.0250 by the end of the week.
There is no greater proxy for risk in the forex market than the Australian dollar (AUD) as the interest offered in Australia and its liquidity make it desirable for carry trades. Recent selling in the Aussie vs. USD has pushed it lower to just above parity with USD as the risk emanating from the Euro debt crisis has the markets on edge.
As you can see from the chart below, the Aussie is sitting just above the 50% Fibonacci retracement level on the pull back and this is a critical level as a major breach and close beneath that level could mean additional selling down to the .975 level.
This would coincide with greater risk in the Euro zone as bond yields continue to rise with no credible plan to halt this action. This makes debt financing more expensive for the Euro zone which makes it ultimately harder for them to service their debt.
While I am not advocating a short position on the Aussie, I think the psychological support at parity will hold in the near-term with the potential to bounce higher to 102.50. Not to mention the considerable cost (negative interest carry) that is implied by shorting a high yielding currency. Of course if problems persist in the EU, look out below!
The Australian dollar (AUD) is a desired currency for the the interest that is currently paid and is a favorite of carry-traders when risk appetite is high. Conversly, when risk aversion is high the Aussie usually gets sold off despite the underlying fundamentals of the Australian economy.
The chaft below shows that we have a potential double-top candle formation on the AUD/USD pair occuring right at the R1 daily pivot resistance level. This could mean that a sell-off is coming. While the markets have been hopeful that the Euro debt crisis will soon come to an end, this doesn’t appear likely in the near-term.
In addition, the RBA revealed in the release of their rate policy meeting minutes that they were comfortable with current inflation figures so the next move in Australia could be to lower rates. In this regard, we could see the Aussie move lower, possible back to the S2 daily pivot support just ahead of parity (1.00) with USD.
As we predicted on Monday, the Aussie has broken out vs. USD and is now trading firmly above parity as risk appetite has returned to the markets. Global stocks and commodities are up as the marekt believes that a resolution to the Euro debt crisis is near.
In addition, a strengthening Chinese Yuan may actually be a good thing for Australian exports as they now become cheaper to the world’s second largest economy. For those concerned about inflation, this could be a catalyst in the not so distant future.
Normally, when a double-top resistance is broken like occurred at parity in the chart, that area now becomes support. Tomorrow will bring the Australian employment report and while we don’t have an opinion one way or the other on the report, we believe that the Aussie will trade up to the R4 daily pivot resistance and then establish a range between 1.00 and 1.025 as we vacillate between risk themes in the markets
The Australian dollar is approaching parity again with USD as risk appetite has returned to the market on news that there may be a solution to the Euro debt crisis by the end of the month. At least that’s the hope and the word coming out of the Euro zone. But there is more to the Aussie than just being a proxy for risk in the markets, and the Australian economy reflects global economic health as Australia has close ties to China.
There have been rumblings in the market that the RBA would cut interest rates in Australia if the global economy declined further though that sentiment has been reduced since the announcement of a potential Euro zone solution. This week China will report economic data that will show the health of their economy which will affect the value of the Aussie as China is the number one importer of Australian raw materials.
On Thursday, the Australian employment change will show the health of the economy there and whether or not an interest rate cut may be coming. Until that time, my guess is that the Aussie will trade above parity.
The Australian dollar “the Aussie” has been selling off in response to the Euro debt crisis which is no surprise, though the individual fundamentals are not as bad as they seem. The AUD/USD pair is sitting on S2 daily pivot support at a critical level at 1.02.
While the pair is likely to continue to trade on risk themes, recent data showed that consumer confidence figures came in much higher than last month despite lowered housing starts. While some might say there is a bit of a housing bubble going on “down under”, a slowing economy may not necessarily be a bad thing.
If the RBA keeps interest rates steady at 4.75%, they will remain a desirable place to invest despite the risk in the marketplace.
