FXStreet (Delhi) – Sean Callow, Research Analyst at Westpac, suggests that over the long run, the Aussie dollar can largely be explained by the prices of Australia’s key commodity exports and interest rate differentials but short term there is usually a role for measures of global risk appetite.
Key Quotes
“An obvious proxy is the US stock market. Over the course of 2015, the daily correlation of percentage changes between the S&P and AUD/USD was 0.26. This is moderate but positive as usual. So far in January though, the correlation is a hefty 0.69. This is similar to 0.65 on USD/JPY, with the yen also proving very sensitive to equities this year, though of course in the opposite direction to the Aussie.
So AUD cannot ignore the wild gyrations in global equities that show no sign of abating. But it is fair to ask whether the equity volatility is sending us clear signals on the global economy. The lack of correlation between China’s economy and its stock market is widely understood. But we can’t be so dismissive of the weakness in OECD equities.
Should we be bracing for a substantial growth slowdown? Well the Bank of Canada for one declared this week that despite “sharp price movements in a range of asset classes, global growth is expected to trend upwards beginning in 2016.”
The BoC deemed the renewed slide in oil prices “a setback for the Canadian economy” but overall was confident enough to hold rates steady despite market pricing >50% for a rate cut.
We suspect the RBA next month will take a similar view, that the volatility will not derail global growth, muted though it is likely to be. This supports the recent AUD/USD price action, where even the most alarming global equity declines have not been sufficient to send AUD/USD below 0.6800. This doesn’t mean we expect the pair to push much beyond 0.7050 near term but it does at least hint that overall AUD is trading mostly in line with the Canadian view not to panic.”
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