Is it 'risk on' for the Aussie dollar?

Rising geopolitical tensions have caused nervousness in recent days but there are already signs an Australian dollar recovery is in the pipeline.

There has been a lot thrown at the Aussie dollar in recent times. Last week in particular saw a sharp increase in risk aversion on global markets due to escalating geopolitical tensions and of course the unexpected rise in the headline unemployment rate. One look at an hourly price chart shows a rather sharp decline from US93.5c to a two-month low of US92.4c in about 24 hours following the employment report, but has held firm since with the broader US92c support level still holding.

Graph for Is it 'risk on' for the Aussie dollar?

AUD/USD hourly chart; AUD/USD daily chart.

The Reserve Bank has been expecting unemployment to nudge higher, and on Friday in its monetary policy statement it shaved 0.25 per cent off its 2014 GDP forecast to 2.5 per cent. The bears emerged once again to talk up the need for another rate cut but many economists are putting the 6.4 per cent unemployment rate down as an irregularity due to a change in the sampling technique of the ABS.

US dollar and Japanese yen down

Movements higher in the US dollar and Japanese yen during times of conflict and with no tier-one economic data are usually a good sign that risk aversion is in play. This was evident about the middle of last week when news broke of the US engaging armed forces in Iraq, with both currencies strengthening.

However there are early signs that risk appetite is already returning to the markets with the greenback giving up some of its recent gains against the euro and the other safe-haven currency, the Japanese yen, weakening.

If further US dollar weakness persists and sentiment among Australian consumers and businesses continues to improve this week then I expect to see the Australian dollar push back towards US94c.

Will negative China and Australia data carry more weight?

On the other side of the agenda however we also have the second-quarter Australian Wage Price Index, with growth in wages unlikely to deviate from the previous quarter at 0.7 per cent. There is a risk, given the rise in unemployment, that wage prices will actually decline. Further selling pressure on the currency front could come in the form of subdued China data, with both new loans and industrial production expected to fall compared to previous months.

I suspect that despite the possibility of important local data coming in softer than forecast, shifting sentiment towards risk will dictate currency direction. Unless we get a clear break below US92c in the next week then it is likely the Aussie dollar will gravitate back towards the middle of the range where it is likely to remain until the fourth quarter of the year.

Jim Vrondas is chief currency strategist, Asia-Pacific at OzForex, a global provider of online international payment services and a key provider of Forex news.

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