Currencies | Oct 12 2012
By Andrew Nelson
For a while now the AUD/USD cross has been a pretty good proxy for global market sentiment. This is because about 70% of Australia’s exports are commodities, which ties the Aussie to the ups and downs of global demand.
In fact, as Commonwealth Bank Chief Currency Strategist, Richard Grace, notes at the moment, the AUD/USD is the fourth most liquid currency cross in the foreign exchange market. This, he notes, makes it much easier to use AUD as a sentiment barometer.
As always, change is a constant and with the AUD/USD now heavily supported by demand for AAA sovereign yield, the swap’s global growth barometer status is now much less relevant. Grace notes that since the beginning of 2010, it is the EUR/JPY that is providing a much better read on global economic growth and global risks.
Moreover, the Fed and ECB policy-inspired run in commodity and equity markets that has been playing out since July is now showing more than some signs of running out of steam. Grace believes the EUR/JPY will now start to feel some real downward pressure as European stocks and industrial commodity prices start to move a little lower.
Grace sees additional downward pressure on EUR/JPY, at least for the short-term, coming from S&P’s expected decision to downgrade Spain’s sovereign rating one notch to BBB- (outlook negative). As yet, European and US investors haven’t really come to grips with this latest bit of wonderful news from Europe, which has created a modest short EUR/JPY position at the current spot of 100.40. Grace sees this as a nice little short-term opportunity with a stop at 102.00.
Looking at longer-term opportunities, Grace thinks it’s worth considering that we’re probably less than a month away from when market participants will likely start pricing in some risk premium related to the potential arrival of the US fiscal cliff. In the gap between now and when the results of the US election are known, 6 November, Grace thinks the “the risk of a US recession” will probably also generate a bit of downward pressure on EUR/JPY.
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