Aussie dollar outlook
In what should have marked a period of consolidation for the Aussie, the allure of the 'risk trade' appeared to be all too compelling as the US printing presses sounded in the foreground. The key determinant for the local unit last week was of course the Fed's latest stimulus effort, with a further $US45 billion in monthly asset purchases, in addition to the existing stimulus program (QE3) which buys US$40 billion in asset purchases per month. While domestic headwinds have acted to moderate demand, the greenbacks innate aversion to stimulus has seen the 'by default' factor work in favor risk currencies, with the comparatively high yield of the Aussie an obvious target.
With the Fed's weak dollar policy firmly intact, we consider the path of least resistance remains in favor of high-beta currencies, thereby strengthening the case for further buoyancy for the Australian dollar for the near-term. It would seem the best hope for Aussie dollar bears would be a full-scale bout of the fiscal cliff blues, which may in-turn rejuvenate the greenbacks appeal, albeit for a short period until some sort of stop-gap is found.
The first obvious target for the local unit will be the mid-September highs just above 106-figure, with a material break to the upside of 106.25 US cents likely to fuel further short-covering and stop entry trades, in turn making a return above 108 US cents the next achievable milestone. Should the stars align and markets recalibrate on fiscal cliff concerns and/or the US data pulse turns negative, we expect the 105 region to contain short-term losses before a deeper trough is seen.
In terms of economic signposts, the local week ahead is fairly light with the RBA December meeting minutes on Tuesday followed by the RBA December quarter bulletin on Wednesday's docket. Interest rate pundits will also be listening closely to the commentary of RBA assist Governor (Financial Markets) Guy Debelle at 11.15 AEDT this morning, with a particular focus on how the bank may combat significant headwinds from a consistently strong exchange rate. It also won't come as a surprise to hear the word 'intervention' thrown around by many a market commentator this week, but very unlikely to hear this sort of rhetoric by the RBA.
From the fiscal cliff and usual debt related noise from Europe, the transatlantic week ahead also promises plenty of themes to confirm or counter the Aussie's recent ascent.
The transatlantic week ahead
Amid the usual flow of fiscal cliff related news and conjecture, markets have a host of mid-tier data releases to digest throughout the week. The headline event this week will be Thursday's GDP revision which is expected to show economic growth revised to 2.8 percent in the third-quarter, slightly stronger than preliminary print of 2.7 percent. Housing data will dominate the week with housing starts and building permits Wednesday, followed by existing home sales and the house price index on Thursday.
Thursday's Philadelphia Fed manufacturing release will attract the usual degree of attention before personal consumption data and the university of Michigan consumer confidence indicator will wrap up a solid week of economic release on Friday.
Across the Altantic, the Euro region's largest economy Germany will remain the key focal point in terms of economic feedback. Wednesday's IFO data series will attract the usual amount of attention as a leading indicator of business sentiment and confidence going forward. German producer price data will also be closely watched on Thursday as an early inflation indicator followed by a preliminary reading of Euro-Zone consumer confidence in December.
Fiscal apocalypse is nigh
While much of the globe will be waiting in anticipation for what - if anything - the end of the Mayan Calendar brings on Friday, there's a far more realistic doomsday threat to guide financial markets - the fiscal cliff. The clock is ticking and the perceived lack of progress in negotiations appears to be negating what should have marked a sustained period of strength in light of the Fed's latest stimulus fix. While its apparent markets have downgraded the potential ferocity of a 'cliff' scenario, (given the likelihood of a stop-gap solution) it's also clear the lack of progress will limit market upside potential.
The latest feedback from House of Representatives speaker John Boehner suggests the impasse between Obama's Democrats and Republicans remains wide, noting Obama's was "unserious" about building a consensus with the opposition, adding "If the president will step up and show us he's willing to make the spending cuts that are needed, I think we can do some real good in the days ahead." For now the best both sides of politics can come up with is a statement to the effect of "the lines of communication remain open."
Japan's Shinzo Abe returned to power
After a three-year hiatus, Japan's Liberal Democratic Party leader, Shinzo Abe, led his party to victory, representing the seventh change of leadership in six years. Initial estimates shows the Liberal Democrats have won around 255 seats of the 480 seat lower house, alongside its smaller coalition party New Komeito, which is expected to have won a further 25 seats. Abe has vowed to lift Japan out of its long standing economic malaise and deflationary spiral by unleashing "unlimited" quantitative easing measures, in the style of the US Federal Reserve.
In response to the loss, outgoing Prime Minister Yoshihiko Noda has said he will resign his leadership from the Democratic Party of Japan.
It's apparent the yen is undergoing a slow structural change in its appeal as a safe-haven unit, given its extremely high debt, ageing population and importantly, it's declining status as an export powerhouse. While the spotlight has been on Japan's less than inspiring economic health for some time, the threat of a new government unleashing a barrage of monetary easing initiatives has been the primary catalysts for this new round of selling, which ironically provides a critical boost to Japans export-contingent economy.
The premise of large scale easing has led the Yen to fresh 9-month lows against the greenback, while losing significant ground against high-beta currencies such as the Kiwi, with the NZDJPY pair forging new 4-year highs on Friday. In early illiquid trade, the theme of Yen weakness has moderated to a small degree, but we've yet to see the 'buy the rumor sell the fact' take hold. At the time of writing the greenback is buying 83.4 yen.