Economists may pre-empt markets lower despite cash on the sidelines.
• Aussie looks fragile amidst skittish Q1 data.
• US data is meek as contrarians stroke the fundamentals.
• US equities, via operating leverage and cash, provide the key to 1.10+.
The Aussie dollar has a window of opportunity in which it can rally higher before either the US economy looks robust or US stocks soften. Data out of Australia this week hasn’t been assisting AUD bulls with first quarter data reflecting the impact QLD floods had on the economy’s growth prospects. Construction Work (0.7%), Company Gross Profits (-2%) and GDP (-1.2%) were all down sharply, thus adding dumbbells to the feet of the local unit. Surprisingly the key GDP figure did not send the local unit crashing as carry trade investors were comfortable with the comparative fundamentals with the US. One piece of data that the AUD can leverage off is the strong Q1 Private Capital Expenditure figure of 3.4%. This will assist the economy in outperforming the US over the next 3-6months.
The US economy is looking markedly weaker this week which raises concerns about whether the fledgling economy will equate to losses on stock markets. The data out of the US holds short-term risk to the Aussie as mediocre US data is a positive for the local unit while data which is considered dire will weaken global stock markets along with the Aussie. Of particular note this week were Durable Goods Orders (-3.6%), GDP (1.8%), Chicago PMI (56.6), Consumer Confidence (38K) and ADP Employment Change (38K). None of this bodes well for risk appetite and we could easily see stocks drag the local unit lower come Friday’s pre-eminent overnight payrolls figure.
As it stands the disconnect between the guts of the US economy and equity markets is holding firm and this is propping up risk appetite along with the Aussie dollar. One reason for this is that US companies maintain high levels of operating leverage which allows their companies to capitalise on any upswing in the economy. A second reason stocks have the capacity to go higher is because US companies still hold cash on their balance sheets due to the tightened credit markets post GFC. Due to the potential for an upswing in the US economy in the second half of the year, this could allow the cash to be invested, pushing stock markets higher.
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