Market Analysis

Risk appetite supports the Ozzie dollar

 

Last week was marked by a rise in risk appetite, supported by better than expected earnings, that saw the S&P500 hit a fresh high during early Friday trading. Energy prices continued to rise, as did the volume of the chatter surrounding inflation, a dynamic that is weighing down on the dollar as other currencies find support following increasing hawkishness from the BoE and antipodean central banks. This is the ActivTrades weekly Outlook, where every Monday we analyse the economic calendar and identify key events, focusing on how they may impact the markets. Stay with us over the next few minutes, while I look into how the week is likely to unfold. I will cover a range of topics, including Australian inflation, US GDP and Eurozone inflation.

 

Early on Wednesday the Australian bureau of statistics will publish the country’s quarterly consumer price index for the 3rd quarter of the year. The previous reading was of 0.8% and the consensus points at a similar number this time around. The ozzie dollar has been strengthening in relation to the greenback, reaching a multi-month high on Friday, following a rise in risk appetite motivated by a so far better than expected earnings season, as well as by the improved prospects regarding the outcome of the Evergrande crisis. As risk appetite received a boost, so did the Australian dollar, a currency that tends to do well when investor sentiment improves. Australian 10 year yields have been rising at a faster rate than their American counterpart, as the markets see the rising inflation in the country, especially as lockdown measures start to lift, as likely to force the hand of the RBA in bringing forward the timing of the tapering. This sentiment could intensify should inflation surprise to the upside; a dynamic that would create further upside for the Australian currency

 

Moving on to Thursday, the US bureau of statistics will release preliminary gross domestic figures for the third quarter. This is just a preliminary reading but is likely to matter at a time when there is some uncertainty amongst investors over the intentions of the FED on setting the timing for interest rate hikes. The consensus is that, after a second quarter when the American economy grew by 6.7%, the pace has slowed down with an expansion of 2.5% expected between July and September. The US dollar showed some weakness during the last week, as investors’ expectations started to shift in relation to other currencies, as inflations concerns spread across the globe. On Friday, Jerome Powell, the Fed chairman, pour cold water over the expectations of dollar bulls, remarking that perhaps it is still too early to be discussing interest rate hikes. It is undeniable that inflation remains a concern, as highlighted by the Treasury secretary last week, however, a slowing down in growth should offer some counterweight to such fears.

 

We’ll end our weekly preview by zooming in on the release of the Eurozone’s inflation numbers on Friday. Despite the support found last week, the single currency started this week on the back foot, as the markets don’t see an end to the current dovish stance of the central bank. Within this context of easy money, where inflation, despite a slight rise, has not yet reached the highs found in the US or UK, for example, observers are predicting comparatively modest increments in consumer prices. Last time around the reading pointed at a yearly rise of 1.9% and the consensus amongst analysts is that at the same number is to be expected on Friday. With the rise in energy costs and lingering supply chain issues, there could be a surprise to the upside in the Eurozone’s consumer price index. Nevertheless, it is unlikely that such scenario would lead to an ECB’s dramatic shift towards raising interest rates; meaning that the euro is unlikely to become one of the currencies reclaiming some of the ground lost to the dollar earlier in the year.

 

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