Only a few weeks ago we were talking about the Aussie and the Kiwi acting like safe havens. That talk was premature. After a massive rout in both currencies last week where do we stand now? The move in the Aussie was fuelled by a general sell-off in risky assets and also a large decline in interest rate expectations. Whereas markets had expected a further rate rise by the end of this year, now the markets are pricing in the chance of a rate cut.
The decline in Australian 1-year interest rate swaps (a good measure of short-term rate expectations) has mirrored the decline in the Aussie as you can see in the chart below.
Aussie 1-year rate swap (white line) and AUDUSD (orange line)
Going forward we believe the markets will remain skittish as investors try to size up the chance of a double-dip recession. This will be key for Aussie rate expectations. Although Australia has low debt and unemployment levels its growth is highly leveraged to the global economy. If global growth falters this will hurt Australia since its natural resources sector is a major driver of growth.
Tomorrow's RBA minutes will be interesting, but since the meeting took place before the latest outbreak of risk aversion we think the RBA will have become markedly more cautious on the outlook for rates. Thus the September 6th RBA meeting will be crucial to determine the outlook for the Aussie.
The technical picture for the Aussie is fairly mixed. It may do well against the Swissie and the yen, as these currencies come under pressure due to intervention risk. However, its fate remains tied to investor risk appetite. If this recovers in the short-term then we expect EURAUD to come back under pressure. The enormous jump higher in EURAUD is being eroded as we start a new week. It is currently below its pivot point at 1.3775, which suggests there may be further declines. Support lies at 1.3715 then at 1.3670.
However, in the current environment we would not look for a definite change in trend and are still cautious on risky FX in the medium-term. Any respite for risky assets could be short-lived, so investors must be nimble.
EURAUD hourly chart. After a big move last week it is currently treading water. However, if we get a recovery in risk appetite in the short-term this pair may come under pressure.
Don't forget that you can now follow Forex.com's research team on Twitter: http://twitter.com/forexresearch
Kathleen Brooks| Research Director UK EMEA | FOREX.com
d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: firstname.lastname@example.org| w: www.forex.com/uk
23 College Hill | 3rd Floor | London EC4R 2RT
Now you can follow us on Twitter: http://twitter.com/forexresearch
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.