Risk sentiment may prove to be the key catalyst for Australian Dollar price action as the outcome of current negotiations among US lawmakers about the proposed $700 billion dollar rescue plan to shore up financial markets could spark substantial volatility
Fundamental Outlook For Australian Dollar: Bearish
Significant event risk comes into the picture Tuesday with the release of the contentious new Retail Sales Trend metric. Expectations call for the figure to remain at 0.1% in August, unchanged from July’s result. The report has sparked considerable controversy when it replaced the previously used seasonally adjusted Retail Sales figures after budget cuts forced the Australian Bureau of Statistics to reduce the sample size used to compute the headline figure. Economists have argued that the change has tainted the accuracy of the single most important leading indicator of economic growth because private consumption is the largest component of Gross Domestic Product. The last available point of comparison between the old and new metric is in June: using the new methodology, sales grew 0.1% whereas they fell -1.0% with the old approach. To that effect, the release is likely to lose some of its market-moving potential unless traders see a wild disparity between expectations and the actual outcome. Leading indicators leave room for an upside surprise as Westpac Consumer Confidence surged 9.1% in August on cheaper oil and interest rate cut expectations.
Building approvals are expected to shrink -1.0% on a monthly basis, meaning an annualized contraction of -4.5% in the year to August. Monetary easing on the part of the Reserve Bank of Australia likely proved inadequate to boost real estate investment as the global credit crunch keeps mortgage rates prohibitively high. The Trade Balance may improve in August having surprised sharply to the downside in July, issuing a deficit of –A$717 million. An uptick in fuel imports accounted for the reading as inbound oil shipments surged 29%. Meanwhile, exports were seen lower as outbound agriculture shipments eased -3% while those of coal fell -9%. This time around, imports are likely to give ground following the sharp drop in oil prices. That said, exports will likely remain weak on broadly weaker global demand (including from Australia’s key coal and iron ore trading partner, China).
On balance, risk sentiment may prove to be the key catalyst for price action. As a “carry” currency, the Australian dollar tends to sell off at times of risk aversion and gain when investors feel more adventurous. This means that the outcome of current negotiations among US lawmakers the proposed $700 billion dollar rescue plan to shore up financial markets could spark substantial volatility in AUDUSD. Assuming the markets judge the final version of the plan as meaningfully helpful, the greenback is likely to lose ground initially as risk averse investors that had cashed out of stocks re-enter their positions. This initial reaction is then likely to give way to the broad macroeconomic forces supportive of long term US dollar strength as bond yield forecasts call for continued monetary easing from the RBA while the Federal Reserve boosts borrowings costs over the course of 2009.
