Growth Fears Push Australian Dollar Towards Parity

 |  Includes: FXA, FXE, UDN, UUP
by: Tim Clayton

Pessimism is likely to be the dominant theme during the forthcoming week with Tuesday's PMI indices signaling fresh deterioration in the eurozone and major uncertainties surrounding Asia as China stumbles towards a credit implosion. With markets forced to consider the limits of monetary policy as de-leveraging continues, the Australian dollar is vulnerable to selling pressure towards parity against the U.S. dollar, especially as the latest data still indicates a net long speculative Australian currency positioning. The euro is also likely to dip lower as the ECB prepares for emergency action, but heavy losses should be resisted.

The latest round of global PMI releases on Tuesday will have an extremely important impact on market sentiment and will help resolve contradictory signals seen over the past week.

The old adage of sell in May is in theory little better than folklore as a predictor of market trends, but risk appetite has consistently deteriorated from late April since the financial crash as early optimism surrounding growth fades into the underlying morass of gloom and de-leveraging. The euro has also weakened sharply against the dollar during May for the past three years.

There was a high degree of market uncertainty last week, triggered primarily by the sharp drop in gold and commodity prices. The declines, at the same time as solid equity-market performances and expectations of aggressive central bank monetary stimulus, were broadly inconsistent as monetary expansion should underpin both risk conditions and commodity prices.

The major worry for markets is that the data weakness is an important warning sign of the underlying state of global demand as monetary policy reaches its limit. In this context, the PMI releases this Tuesday will be watched extremely closely with any deterioration reinforcing the pessimistic tone.

As far as the eurozone is concerned, a steady improvement from a trough in July 2012 was unexpectedly reversed for March. The ECB is certainly more uneasy over the situation with increased rhetoric suggesting that an interest rate cut could be sanctioned. The underlying backdrop remains extremely unfavorable and any further PMI slide for April would lead to irresistible calls for action, especially if there is further French decline.

The flash Chinese HSBC PMI data is also due for release as markets fret over underlying credit deterioration. There has been a fresh surge in lending over the past three months, but there are increasing doubts whether this can successfully be deployed to support the economy as credit default fears intensify. Following the weaker than expected first-quarter GDP release, any deterioration would increase unease surrounding underlying Chinese growth and put fresh pressure on risk appetite.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.