Risk currencies enjoy US rate rise delay - but don't get complacent
The prospect that the US interest rate rise has been postponed again gave risk assets and risk currencies a boost – but with the IMF’s second reduction in its global growth forecast signals that there’s plenty of scope for prolonged risk-off moments.
Among the beneficiaries of the recent improvement in risk sentiment was AUD/USD along with commodity markets and equities.
However, the recovery could be short-lived. The IMF, which pegs global growth at 3.1% this year and 3.6% in 2016, warned that weak commodity prices and the China / emerging market country slowdown are hitting global growth. It called for more measures to stimulate economic growth and cautioned the Fed over raising interest rates prematurely.
Indeed, the most recent US jobs report was disappointing and concerns over the global economy continue to pile up on an almost daily basis. This may not be the IMF’s last downward revision to growth.
Meanwhile, the European Central Bank and the Bank of Japan could extend and even amplify their existing quantitative easing programmes next year. If the Fed stands pat on monetary policy as well it could lend support to risk currencies for longer.
However, there are growing questions over QE programmes with some senior central bankers wondering whether they really work in terms of stimulating demand in the economy.
QE was effective at saving the global economy during the worse moments of the financial crisis, but it may not work so well when it comes to stimulating economic growth, particularly if there are profound problems such as dysfunctional credit channels, ageing populations and slow productivity growth.
In the short-term, news of increasingly lax monetary policies is likely to spur rallies in risk currencies and assets, but they may become shorter lived. At the end of the day markets want to see real sustainable economic growth and a normalisation of monetary policy before buying into the idea that the world economy is returning to once familiar growth patterns.
In the meantime, markets are likely to continue swinging between risk-on and risk-off phases creating sharp rallies and sell-offs in the currency markets.
TECHNICAL ANALYSIS: AUD/USD – recovering?
Whereas as the fundamentals don’t appear particularly positive for AUD/USD – besides the recent rally in commodity prices, which could be short-lived – the technicals might be telling a more positive story.
Not long after hitting a low of 0.6907 in early September, the daily slow stochastics generate a strong buy signal and shortly after hitting a higher low of 0.6936 in late September, it printed out another buy signal, albeit a less strong one. These are both important support levels as well.
For the pair to start reversing their long-term downtrend, resistance at around 0.7280 and 0.7440 would need to be cleared.
On the downside the dailies are now pushing into the upper Bollinger bands, which has often been followed by selling pressure. Also, progress of the slow stochastics should be followed carefully as its sell signals have often been followed by sell-offs or consolidations.
It’s unclear yet whether AUD/USD is recovering or merely going through a consolidation phase – the long-term trend is still pointing downwards.
Consolidation phases can last quite a long time. For instance the pair consolidated from March 11 to May 13 before resuming their downward path. The current consolidation pattern, which started around Sept 3, could last several months.
However, the fundamentals with the slowdown in China and its changing economic drivers along with over-production of many commodities and the Reserve Bank of Australia’s vigilance against a strengthening currency – all suggest that over the longer term the outlook for AUD/USD remains bearish.
By Justin Pugsley, Markets Analyst, MahiFX