Australian Dollar Likely to Fall on Economic Data, Risk Aversion

The Australian Dollar faces a triple threat next week as a heavy load of negative economic data and renewed flight from risky assets combine with bearish technical positioning to put downward pressure on the exchange rate. Looking at the calendar, the headline release is undoubtedly the interest rate decision from the Reserve Bank of Australia. Economists’ forecasts call for a 100 basis point cut to bring rates to 3.25%. Looking at overnight index swaps, priced-in market expectations agree with this assessment. Further, long-term bets on the scope of monetary easing have jumped a hefty 20.2% this week, with traders now expecting the RBA to slash borrowing costs by 200 basis points over the next 12 months. Former RBA chief Bernie Fraser also called for benchmark rates to head below 2%, saying the current recession will be “deeper and longer” than the last downturn in 1991.

Elsewhere on the docket, Retail Sales are expected to rebound, adding 1% through December having expanded just 0.4% in the preceding month. An up-tick is to be expected: the series of aggressive interest rate cuts (totaling 3% since September), a fiscal stimulus package worth A$45 billion, and the sharp drop in oil prices (down close to 70% since peaking in July) all contributed to breathing some life into consumer spending and even helped to modestly improve business sentiment. Still, traders may see the effects of these policies losing steam in the months ahead as rising unemployment threatens to weigh on disposable incomes and prompt cautionary saving. Indeed, consumer confidence slipped -2.2% in January, the first decline in three months. The trade balance is expected to continue to weaken in December as the global economic slowdown erodes overseas demand. The International Monetary Fund said last week that global economic growth will come to a “virtual standstill” in 2009 to yield just 0.5%, the lowest yet in the postwar period, threatening to substantially prolong the economic plight of export-intensive countries.

Turning to risk sentiment, the MSCI Index of world stock performance reversed close to 80% of the three-day rally started Monday by the end of the trading week. Shares initially got a boost from as US policymakers moved closer to passing a $819 billion stimulus package and rumors of a “bad bank” scheme to get toxic mortgage-linked assets off banks’ balance sheets flashed across the wires. The upswing faltered as a round of fresh batch of dour US economic releases (Durable Goods and Gross Domestic Product in particular) shifted the focus back to current turmoil. Next week sees a blistering US calendar packed with market-moving releases and culminating in the ominous Non Farm Payrolls report, suggesting risky assets will remain on the defensive. Traders have treated the trajectory of the US economy as synonymous with that of the world at large, expecting a rebound in the world’s largest consumer market to have positive spillover elsewhere.

Finally, the technical outlook is decidedly bearish: AUDUSD has dropped to close the week below key support near 0.64, opening the door for a decline to test recent major lows (10/27/08 and 11/20/08) above the 0.60 level.