The link between China and the Aussie hasn’t gone away: the decreased risk from China supports the Australian dollar, says David Rodriguez of DailyFX.
In the interview below, Rodriguez discusses the the Aussie, the prolonging of the fiscal cliff saga, the situation around Greece and the very weak yen.
David Rodriguez is a quantitative analyst for DailyFX.com, specializing in statistical studies in currency trading markets and algorithmic trading systems for the Managed Accounts Programs offered by parent company, FXCM. He holds a degree in Economics from Williams College with heavy emphasis on quantitative methods and began trading financial markets in the tech boom and bust of 1999-2001. SinQuickce then, David’s primary focus has shifted from equities to currency markets, but he continues to trade futures and futures options on a broad range of asset classes as well as currencies.
1. Fiscal cliff: If politicians reach a temporary solution for 2-3 months, what would be the market reaction? Will it be “risk on” until time runs out once again?
They have indeed reached a temporary solution, and ‘risk’ markets seem unfazed by the fact that they have in essence prolonged this saga by another 2 months at the minimum. The solution was enough to force a material pullback in the S&P 500 Volatility Index (VIX), which does indeed suggest ‘risk’ may continue to do well through the foreseeable future.
2. Greece did not leave the euro-zone in 2012, contrary to many predictions. Is the worst of the crisis behind us, or could we see another crisis when the troika visits again?
The crisis never really went away, and the risks to Greece in particular remain very real. Yet periphery bond markets have recovered substantially, and price action suggests the worst is past. The situation can always change in an instant, however, so it’s important to not ignore deterioration going forward.
3. Recent Chinese PMIs have been quite upbeat, but the Australian dollar hasn’t been on the rise. Is the link between China and the Aussie weakened?
No, I don’t think so. The Australian Dollar hasn’t rallied, but you have to remember that it’s just short of record-highs; the fact that it continues to hold current elevated levels suggests that decreased risk from China have benefited the high-flying currency.
4. The new Japanese government continues the pre-election rhetoric and the yen continues to weaken. What could stop the downfall of the yen? At what point would the tone change in Tokyo?
The political will is strong, and there’s little reason to believe they will tone down rhetoric through the foreseeable future. Instead I’m paying close attention to the fact that trader sentiment seems to be at or near an extreme. The Japanese Yen’s turn lower has been so dramatic that it’s dangerous to claim that a correction is likely. But the risk of important pullback is real as professional speculators have turned their most bearish Japanese Yen (bullish USDJPY) in quite some time.
Further reading: 5 Most Predictable Currency Pairs – Q1 2013
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