Australian Dollar Looks To March Higher Absent Risk Aversion

The Australian dollar rose to a fresh yearly high of 0.9368 against the greenback as continued risk appetite and unexpected job creation in October fueled bullish sentiment. Equity markets continued push higher with the Dow setting a fresh yearly high as traders took comfort in the G-20’s pledge to maintain low interest rates and stimulus programs. However, the RBA isn’t expected to follow the pack as they have already raise rates at their last two policy meetings and markets are currently pricing in an 83% chance that they will continue to tighten at their December (November 30th ) rendezvous. The prospect of higher borrowing costs led to 2.5% drop in consumer confidence, the first in six months. Confidence remains relatively high, but declining optimism could negatively impact domestic consumption which unexpectedly fell 0.2% in September.

The weak demand had raised the prospect that the RBA would take a break from their tightening policy at their December meeting as there are concerns that premature rate hikes could derail the recovery. Additionally, Governor Stevens last week signaled to markets that the strength of the Australian dollar would limit upside inflation risks and give him the scope to slow the pace of future rate increase. However, the surprising job growth re-established expectations for an additional 25 bps hike as it reaffirmed the Governor Stevens statements following November’s meeting that “there have been some early signs of an improvement in labor market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.”

The upcoming economic calendar may only add to the likelihood of a rate increase as the wage cost index is forecasted to show a 0.7% rise in the third quarter, adding to inflation concerns. Westpac’s leading index which tracks eight gauges of activity, such as company profits and productivity, to give an indication of how the economy will perform over the next three to nine months is also due for release. If it continues its current trend of improvement then the brighter outlook for growth will add to the case for future tightening. Rising interest rate expectations will continue to be a supporting factor for the Australian dollar which could see the com-dollar eventually look to test its all-time high. However, the RBA will release their minutes from their November meeting which could hint at the prospect of keeping rate steady at their next meeting which could weigh on the Aussie. Additionally, the high yielder loses its attractiveness if risk appetite wanes which could be the case this week with equity markets up against technical resistance levels. - JR

New Zealand Dollar Fundamentals may Soon Overwhelm Risk Appetite

The New Zealand dollar is living on borrowed time. Risk appetite single-handedly lifted this currency from a six-year low following the hit it took during the worst financial crisis in modern history; and it is only a matter of time before the aggressive rally collapses under it s own weight. Is this kiwi dollar really destined to pace investor sentiment? Yes. Not only does the currency maintain a yield that through history has kept a significant premium over its counterparts; but its mere presence among the list of most liquid currencies can be attributed to its appeal as a place to park capital. In fact, under most scenarios (even a revival in the demand for yield); it is likely that the kiwi will not only retrace its gains but it may actually pace the over-due correction.

While it is possible that the New Zealand dollar could struggle or tumble even if sentiment is steady or rising; it is best to first cover the most direct fundamental scenario: a plunge in risk appetite. Though the Dow Jones Industrial Average and Gold closed their respective weeks at new highs for the year; there is growing skepticism among the trading ranks that the drive can hold up for much longer. Measuring the conviction for both of these markets, volume for both hit new monthly lows. From a more historical perspective, we haven’t seen a rally from equities of this magnitude in recent history. From technical review to fundamental assessment, it is not a stretch to propose values have run astray of the economics that support them. The return of idled investor funds from the harbor of safe haven assets back into the speculative arena has filled in for the lack of reasonable yield income with the thrill of capital gains. However, eventually a balance will be struck where the speculators will be tapped and what remains to be invested will belong to those managers that are cautiously awaiting the return of dividends, yields and other stable rates of return. When the tides turn, the collapse from profit taking will likely be more severe (though not as deep) as the initial rally.

Daily Report: Aussie Rises on Employment Report, Dollar Consolidates

Australian dollar rises today on the back on unexpectedly good employment report. The job market expanded for another month by 24.5k in in October versus expectation of -10.1k contraction. Though, unemployment rate climbed from 5.7% to 5.8% as expected. AUD/USD soars to as high as 0.9368 so far. While upside momentum is diminishing a bit, there is still no clear sign of topping in Aussie yet and the current rise in AUD/USD might still extend further to a test of 2008 high of 0.9849. Against Euro, EUR/AUD, took out previous low of 1.6079 and dives to as low as 1.6017. We're still expecting further downside in the EUR/AUD cross towards lower trend line support at 1.5702 next.

Mid-Day Report: Sterling Pounded By BoE King's Comments

Sterling was knocked down earlier today after BoE Governor King said that the bank is "completely open mind" on extension of the quantitative easing program. King believes the program is "working and the risk of another depression has "sharply diminished". Nevertheless, it "will be a long, hard path back" to a robust economy. Also, King reiterated that "The depreciation of sterling should lead to a recovery in economic activity." Sterling is sharply lower against Euro and dollar after the comments.

In he Quarterly Inflation Report, BoE forecasts for GDP growth and inflation outlook. These estimates were made based on assumptions that the benchmark interest rate, currently at 0.5%, rises to market expectation of 1.1% in 3Q10 and 2.1% at 1Q11, as well as asset purchase program of 200B pound. BOE also anticipated inflation will rise sharply in the near-term and exceed the target level of 2% in 2012.

Also released from UK, unemployment rate was unchanged at 7.8% in September, better than expectation of a rise to 8.0%. Claimant count also rose less than expected by 12.9k in October.

Elsewhere, dollar dips to new low on dovish comments from Fed officials. Dollar Fed Fisher said that inflation is likely to remain subdued for some time and the near-zero interest rates are appropriate. He said growth was likely to be "suboptimal" into 2010 and 2011, with unemployment a "vexing problem." San Francisco Fed Yellen said the prospect of a “jobless recovery” in a speech yesterday. Atlanta Fed Lockhart expects a "relatively subdued" growth pace this quarter and beyond.

BOE Upgraded Forecasts on Growth and Inflation

At the quarterly Inflation Report in November, the Bank of England raised forecasts for GDP growth and inflation outlook as economy has expanded again and will not slip back into a recession. These estimates were made based on assumptions that the benchmark interest rate, currently at 0.5%, rises to market expectation of 1.1% in 3Q10 and 2.1% at 1Q11, as well as asset purchase program of 200B pound.

According to the quarterly Inflation Report, the UK's economy will undergo a 'slow recovery' and 'the outlook for inflation in the medium term is somewhat higher than the August report, reflecting the stronger projected distribution for GDP growth... the risks of inflation being above or below target are broadly balanced by the end of the forecast period'.

Although the nation's GDP surprisingly contract -0.4% qoq in 3Q09, the central bank revised up its GDP forecasts and signaled revisions of 3Q09 data. According to the BOE, upward revisions reflects the increased asset purchases, the lower interest rate path implied by market yields, the lower level of the exchange rate and a stronger outlook for world demand.

The BOE also anticipated inflation will rise sharply in the near-term and exceed the target level of 2% in 2012. According to the report, 'the risks of inflation being above or below the target are broadly balanced by the end of the forecast period. The outlook for inflation in the medium term is somewhat higher than in August, reflecting the stronger projected distribution for GDP growth'.

Australia Unemployment Rate Preview and EUD/AUD Outlook

(November 12, Thu) Australia unemployment rate - October: After a surprising increase in payrolls (+40.6K) in September, a modest decline in employment (-10K) is expected in October. This should have pushed the unemployment rate +0.1 percentage points higher to 5.8%. Although economic recovery has been robust in Australia, unemployment rate may continue to rise from current level in coming months. However, the peak should be lower than what was expected by the market in the first half of the year.

In September, the number of persons looking for full-time work increased by 9500 to 497 400 and the number of persons looking for part-time work decreased by 13 300 to 161 200. This halted the recent trend that workers looked for part-time jobs due to reduction in full-time unemployment. We believe the number of workers looking for full-time jobs should have increased further in October.

Also, aggregate monthly hours worked increased 13.4 million hours to 1522.4 million hours in September. This was driven by improvement of economic conditions. The trend should have continued in October.

Daily Report: Yen Recovers on Risk Aversion, BoE & ECB Watched

Yen recovers some ground today as Asians stocks dip after late selloff in US equities. Dollar follows by paring some of this week's losses as crude oil is back below 80 level while gold trades below 1090. Risk aversion would probably give the Japanese yen some further support as Japanese Nikkei closed below head and shoulder neckline support which should confirm medium term reversal. However, dollar's fate will continue to be tied between risk aversion and strength in gold.

FOMC statement overnight was largely inline with markets' expectations. Fed decided to leave the Fed funds rate unchanged at 0-0.25% and reiterated to keep it low for 'an extended period'. The Fed also listed conditions that warranted an unprecedentedly low level of interest rates: low rates of resource utilization, subdued inflation trends, and stable inflation expectations. In the meeting, policymakers also modestly upgraded its assessment of current conditions and reduced the amount of agency debt it purchased. These mildly positive factors partly offset the dovish tone of the post-meeting statement. More in FOMC Review: The Fed Disclosed Parameters For Making Rate Decisions