Aussie’s Hesitance to Rally May be Due to Europe

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Despite far stronger than expected labor data and despite the relatively hawkish posture of the RBA which kept rates on hold instead of lowering then by 25bp as most market analysts had forecast, the AUD/USD has not been able to generate any upside momentum. The pair remains capped at the 1.0450 barrier and has failed all recent attempts to broach that level even as Chinese data appears to be strong indicating that export demand should hold for now.

Why such reticence to rally? The weakness in Aussie may have less to do with China and more with Europe, as global investors continue to worry about the developments in the Eurozone. Today’s announcement that Greece passed it austerity budget has done little to allay those fears as the issue of Greek bailout remains an open question with Eurogroup finance ministers meeting not expected to produce any definitive conclusion to the matter.

Furthermore, the sovereign debt problem in Eurozone may now have less to do with credit default risk and more to do with the general sense of economic malaise that that has permeated the continent. One of the more toxic side effects of the two year EZ sovereign debt crisis is the fact that it has put a freeze on general business activity in the region with the result that many investors fear that the recession which has gripped the periphery European economies may now hit the core economies of Germany and France.

If both Germany and France tip into a recession the concomitant decline in region’s demand is sure to impact China’s export sector. Europe is one of the most important exports markets for China and any slowdown in the region is sure to reverberate across in Asia. That’s why despite the seeming evidence of a “soft landing” in China and the weekend’s better than expected Trade Balance data investors are less than optimistic about the growth prospects in 2013.

The AUD/USD therefore is reflecting those concerns and that’s the price action in the pair has been timid. Furthermore, if the economic situation in Europe continues to deteriorate into the end of the year, the pair may see more downside pressure over the next few weeks.

Boris Schlossberg
Managing Director

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