Aussie Dollar Rally Could Be Over

 | Mar 22, 2017 12:52

Originally published by AxiTrader h2 Key Takeaway/h2

Like the little engine that can't the Australian dollar has once again dropped below the 77 cent level this morning after the sell off in US stocks accelerated into the close.

At 0.7784 it's a big underperformance to the other majors which have performed strongly against the US dollar. But the fact that the yen has rallied hard, and the Aussie has been joined in its mild swoon by emerging market currencies tells us this is about risk appetite - or a lack thereof.

But just as the outlook for growth, prices of commodities, interest rate differentials, and the US dollar are all fundamental drivers for the Australian dollar so to0 is the ebb and flow of investor risk tolerance. And it's thus how the Aussie dollar's rally has been snuffed out for now.

h2 What You Need To Know/h2

It's only been one day out of almost 110 that we've seen the US stocks, and the S&P 500, fall more than 1%. But it was enough to cruel the Aussie dollar's rally this morning.

It is worth noting that the dip back to 77 cents support was something that I flagged yesterday as a short term risk. So it's not a collapse though - neither for the Aussie or US stocks. But it is also worth discussing the linkage between the AUD/USD and risk appetite. That linkage comes from the role the Aussie dollar plays in global investor's and trader's portfolios.

Australia is the world's 12th or 13th biggest economy. But our currency is the world's fourth or fifth most traded currency. That's because traders and investors often use the Aussie as a proxy for overall global growth and specifically for Chinese growth also.

That's not to say domestic factors are not important. Obviously they are. But when the stars align and traders are either ebullient or pessimistic this linkage magnifies any domestically induced cycles.

And it's precisely because the Aussie dollar is used in this way that it then becomes an outside bet in traders and investors portfolios. That's particularly important if risk appetite wanes and markets experience a period of raised pessimism. Such a period usually means that traders and investors get closer to home, or their benchmark.

That means they sell Aussie dollars.

So it's only a one day more in stocks but it's already had an impact on risk assets like the AUD/USD. And as my title to this article says if markets are going to unwind the Trumponomics rally the Aussie dollar's rally is over.

We'll see.