Australian Dollar Momentum and Sentiment Point to Gains:8/8/2010

 

The Australian Dollar finished the week near multi-month highs against its downtrodden US namesake, bolstered by similar strength in the S&P 500 and general financial market risk sentiment. Consistently strong Australian economic data served to bolster the currency further, and it seems that fundamental trends point to continued AUD gains. A comparatively empty economic calendar in the week ahead should theoretically mean slower currency price moves, but traders should watch out for any noteworthy surprises in upcoming Australian Employment Change results.

The Australian Dollar finds itself in a position of strength amidst solid fundamental trends and bullish sentiment amidst global financial markets. In fact, forex options markets’ three-month volatility expectations for the AUDUSD have fallen to their lowest levels since early May—at which point the AUDUSD traded near $0.9300. Given that the Australian Dollar boasts a fairly significant yield advantage versus the US Dollar and other counterparts, the promise of low currency volatility encourages speculators to buy the AUD on the assumption that interest rate payments will offset any potential currency depreciation. Of course financial markets are very fickle, and any significant deterioration in risk sentiment could easily shift expectations and force noteworthy AUDUSD pullbacks.

Barring a substantive shift in market sentiment, market dynamics favor further Aussie dollar strength. Traders should monitor any and all surprises in the upcoming Australian Employment Change report, but it may take a fairly large disappointment to truly derail economic outlook for the antipodean economy. It will otherwise be critical to watch the trajectory of the S&P 500 and similar asset classes. The index initially took a dive following relatively disappointing US employment data, but a quick recovery through later trade suggests that bulls have some fight left in them. Whether the index continues to press higher may be the most important factor in determining the direction of the highly risk-sensitive Australian Dollar.