httpvh://www.youtube.com/watch?v=JYpyAFLGMqo
AUD free-falls via US stocks and local data.
• Aussie unassisted by lethargic local data.
• US data looks skittish as equities could have dragged the Aussie lower.
• Political indecision in Europe leaves Greek debt vulnerable.
The data out of the Australian market this week has been weak and the only thing stopping it from free falling further was because the US economy performed poorly. Comparing our data with that of the US is a good way to assess potential movements in the Aussie against the majors due to our comparatively high interest rates and correlation with the resources boom. This week we’ve seen the local market come to resemble the meek growth we’re used to from the States with a raft of data suggesting our economic behemoth is taking a breather. Employment Change was the worst offender with 22.1K jobs lost during April while silver was given to the Wage Price Index at 3.8%, both reducing the heat on interest rates. This means the upward pressure on the Aussie will be far less acute in the short-term. The AUD was able to mildly pare these losses; however these data removes the ability for recent highs to be recovered.
The US recovery doesn’t have a lot of fat to it currently and this was the only thing stopping the Aussie being pulled significantly lower. The Aussie was allowed to recover as the US recovery continued this week albeit slower than peak hour traffic. Building Permits (551K) and Housing Starts (523K) failed to show growth as the NY Manufacturing Index contracted while Long-Term Capital Flows (24B) suggest that the slow pace of the recovery is surprising most analysts. With equity markets down heavily for the week (S&P500-2.62%) the local unity had every reason to drop three cents and the weak fundamentals in the US were the only thing stopping it from falling further. There is some US political risk as US Treasury Secretary Timothy Geithner threw his support behind raising the debt ceiling in the US saying that it should not be a topic of debate. He called for bi-partisan support on debt issuance, unlikely given the political capital at stake.
European Central Bank officials have warned against a potential restructuring of Greek debt as the quasi default would attach significant risk to their financial system. ECB board member Juergen Stark noted that a restructuring would “create a catastrophe” which is in stark contrast to other leaders who called for a “soft-restructuring”. There is 50b Euros available through the privatisation of Greek assets however despite this potential windfall, Greek 10-year rates have risen to 15.7%, more than double where they were this time last year. ECB indecision will leave the European financial system exposed, the reason why the current scandal surrounding IMF chief Strauss-Kahn, a European, is potentially detrimental to the Euro solution. Despite the above, the AUDEUR fell this week due to a German inspired GDP figure for the Eurozone of 2.5%.
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