Fundamental Forecast for Australian Dollar:Bearish

The Australian Dollar had another weak week, falling across the board while only posting gains against the New Zealand Dollar. The Aussie’s 2.67 percent drop against the U.S. Dollar could have been worse, given itsstrong correlation to U.S. equity markets: the Dow Jones Industrial Average dropped 2.94 percent and the S&P 500 slid by 3.81 percent. Markets are beginning to show signs of exceptional distress but not panic yet – the falls this week was an orderly decline marked by slightly higher volume than recent averages, but no major outliers in terms of market participation. With that said, it appears the Australian Dollar may have some catching up to do to the assets which it is highly correlated to.

In terms of event risk on the docket the coming week, there is not much significant data to look forward to. The Conference Board Leading Index is due out on Tuesday, but that as the standalone headline fundamental event on the week will not alter the Aussie’s projection against the other major currencies. In fact, recent economic data out of Australia has done little to stem the commodity currency’s erosion: even the Reserve Bank of Australia’s Board minutes this week, which were less dovish than anticipated, could not prevent the Aussie’s depreciation for more than a few hours.

Looking ahead, market participants will eye broader trends to determine the fate of the Aussie. Global liquidity conditions are showing signs of distress across the board; the Euribor-OIS 3-month spread, for example, has been steadily increasing and has been this high (on the way up) since the last week of September 2008. This is a major red flag.

As a speculative investment vehicle, given its high yield, the Australian Dollar looks to suffer in the coming weeks. Aside from lingering near a level of major technical support, the fundamentals just don’t exist at present time to suggest the Aussie could climb back towards its October high, nevertheless its all-time high set in July, at 1.1082. As such, with markets steadily losing confidence in the Euro-zone’s ability to pull itself from the brink, look for the Australian Dollar to falter as global financial conditions continue to erode. – CV