Foreign Exchange AUD Update

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Risk rallies as the Euro crisis drags on…

The Aussie dollar is currently holding above parity. Rallying 10% against the greenback, and similarly against other currencies, in a long winded two week relief rally as an increased appetite for risk to gain reward fuelled markets ahead of corporate earnings season in the USA.

U.S. housing starts in September topped expectations providing confidence for global markets. The strongest support for the AUD was the creation of 20k new jobs last month. However job ads were down 2.1% perhaps indicating an easing in the jobs figures to come.

At the same time markets became increasingly optimistic and expectant of a resolution to the Euro zone’s sovereign debt crisis in the EU summit scheduled for the 23rd. The Guardian Newspaper in the UK sparked a prior rumour that an agreement had been reached to increase the European bailout fund. The Germans quickly poured water on this saying the bailout fund will not be raised beyond the 440 billion Euros already approved nor will Germany’s participation rise beyond 211 billion Euros.

Trading on rumours and headlines, markets have been and shall remain volatile. The European Central Bank has promised unlimited liquidity to European banks to stave off aggressive bond markets and talks of leveraging the bailout fund to increase its size without actually adding funds to it also remain a possibility. However, the 17 Euro nations seem reluctant to commit to permanent solutions, such as a common euro bond issued by the ECB. They seem to prefer measures that buy more time and hope that their economies will grow their way out indebtedness with good fiscal balance.

German Chancellor Angela Merkel talked down expectations of a “bazooka” solution, adding that past errors will not be solved in one stroke. Germany, the euro zone’s strongest economy, has been reluctant to back aggressive measures to contain the crisis due to worries it has already overextended itself as its economy is slowing.

In the meantime, more European nations, such as Spain, have had their credit ratings cut whilst others, such as France, have been placed on a negative watch for a possible downgrade in the future. Greece’s debt is now calculated as requiring a 64% write down to be sustainable and without more imminent funding, Greece will be out of money within a few weeks.

It is hard to see how Asia and the global growth reliant Aussie will maintain high levels of production with the two biggest consumer economies, the EU and USA, in such a heavily constrained position.

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