The Australian dollar's performance over the past week has been marred by persistent negativity over China's growth sustainability amid an unexpected bout of post-Fed lethargy. Earlier in the week, the release of the RBA minutes showed the board delicately downgraded their previous statement suggesting there were "tentative signs that Chinese growth might be stabilising at a more sustainable pace," instead the September meeting minutes omitted this language preferring to simply acknowledge most recent data had been a "touch weaker." The minutes demonstrated the board has the breathing space to further support the economy noting "the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth." The minutes also acknowledged the implications of the high Aussie dollar, noting the high exchange rate was "weighing more heavily on the economy than might be expected." In short, there is a valid case to suggest the RBA's next move could indeed be to cut rates; nevertheless it is also clear the board are reactive to the incoming data pulse which may not cement the case for further monetary easing in time for a October rate cut.
A Chinese national flag sways in front of Google China's headquarters in Beijing in this January 14, 2010 file photo.
Both macro and anecdotal evidence continues to point to diminishing growth prospects in China, amid a reluctance from monetary authorities to embark of further easing initiatives given the risk of reigniting inflation. There's also a sense the Peoples Bank of China may hold off on new stimulus measures in response to the Fed's latest quantitative easing venture. It's clear the Aussie dollar as a proxy to China continues to reflect this negativity. The week ahead is as light as they come for the Australian dollar with private sector credit data headlining the macro week on Friday. This places the emphasis back on the global risk trends to define the trend with feedback from both sides of the Atlantic the likely directive. The window of opportunity for the Australian dollar remains well and truly open, a risk-on market demeanor underpinned by the Fed's latest stimulus effort could force a resumption of U.S dollar weakness - in turn the Australian dollar will be standing by to enjoy the spoils.
In light of the Fed's last stimulus effort, one may be forgiven for expecting the greenback's natural aversion to stimulus to carry the currency deeper into the doldrums, however the Fed's QE3 appears to of taken a back seat last week with investors focusing on fundamentals rather than the short-term merits of QE3. It is also possible markets have developed immunity to each new round of Fed easing, suggesting the impact will be less of a shock then previously. Nevertheless, risk trends will continue to guide the greenback's fortunes over the course of this week, and market participants will be focused on the U.S data pulse for the answer. Among a host of Fed manufacturing gauges, the focus early this week will be consumer confidence and housing data with second-quarter GDP, durable goods and personal consumption data the primary focus in the latter half of the week. It is clear the greenbacks best hope to build on last week's gains is a fully fledged return to a risk-off environment. Importantly, with markets yet to fully enjoy the short-term benefits of QE3, moderately positive data may spark a significant bounce across the risk spectrum with the US dollar first in the firing line.