Andrew Taylor, GFT

Question: 

What factor do you think affects the Aussie dollar the most – interest rates, commodity prices or China? Which factor should traders most closely watch?

Answer: 

It is a great question and one that will have different traders batting for different answers. For me, I do have a bias for one, but feel it necessary to give you the background to how I have drawn my conclusion.

On any given day, all of those three elements suggested could have an impact on the direction of the AUD to some extent, but you could also easily add Growth numbers, Offshore influences, Consumer and Business confidence, Inflation figures, Labour market, Housing market, Stock & Bond Markets and the list goes on – they are all pieces of the economic puzzle.

You are probably thinking now ‘gee, I was hoping to narrow the list not extend it’. The truth is that there are a myriad of factors that will affect a currency, particularly on a short term basis. The best way to keep your focus on the appropriate AUD drivers is to divide the influences up into 3 main categories - Macro, Micro & Monetary policy.

I brought this up in a quarterly address recently and the feedback I received really did reflect what so many traders constantly struggle with, that is, to prioritise and decipher the news at the same pace as what the market players do. In my response, I explained that the aim is to adopt a simplified approach that incorporates all 3 of these factors. This should assist in quicker interpretations as well as keeping your sanity.

Macro Factors

Characteristics:

•    Tend to effect over longer periods of time
•    Often has a Global Impact
•    Dominates over other news

Some good examples of Macro factors are Geopolitical events, Oil and Gold prices and Risk Appetite.

Risk appetite is a term that is used to describe the sentiment and capital flows of the market as a whole. The terms used are:

•    Risk On
o    Optimism about future prospects of that market
o    Capital flows into Higher yielding assets
o    beneficiaries usually are AUD, Equities, Commodities

•    Risk Off
o    Negative view/uncertain sentiment in the markets
o    Capital flows leave risk assets to low yielding ‘safe havens’
o    beneficiaries include JPY, US Treasuries

When there is an air of confidence and certainty in the markets (Risk On), traders feel comfortable to hold positions in assets that offer better yields than those of the perceived lower yielding safe haven assets.

Micro Factors

Each month countries produce economic data that help gauge the state of the economy. This continuous insight helps traders predict future Fiscal and Monetary policy decisions. The areas that traders tend to want to know most about are:

•    Labour data – Unemployment rate, Job Ads
•    Manufacturing and services data – Trade Balance, PMI, PSI
•    Inflation data – CPI, PPI, TD Inflation
•    Sentiment – Consumer and Business Confidence

Some data releases have a greater impact over others so it is imperative to source a decent economic calendar that will give a rating to the likely impact of the data being released. www.fx360.com is one such calendar that I keep open.

Monetary Policy

Here the Central Bank looks to manage money flows within the economy. Apart from the setting of the Cash rate, a fair amount of market influence is derived from the insights that are released in the Reserve Bank official statements. Understanding their view on market conditions is very valuable to traders in assessing the board members rationale behind their actions and key points they will be looking for in the future.

Characteristics:

•    Setting of Interest Rates and Official Policy Statements
•    Key Driver of Global Markets
•    Central Bank tool to stimulate or suppress desires to spend and save

The RBAs current monetary policy has been moved to an accommodative setting. This is to aid in combating a global and domestic slow down whilst trying to meet its objective of 2-3% p/a for consumer core inflation.

The AUD has seen in recent years, a strong underlying support from investors that prefer to hold the local currency for its higher interest rate differential which has seen moves lower rather limited.

Chinas demand for our resources and Commodity price levels are definite elements that will affect the AUD to varying degrees, but for me, it is the Central Banks rhetoric and rates that is the key driver, as it encompass all on the horizon. This tends to be a truer reflection of how the entire market is travelling, not just the state of the Mining sector. 

By Andrew Taylor, Market Strategist, GFT