By David Frank, Chief Market Analyst, AvaFX
The Australian Dollar appears to have been the worst performing major currency last week against the U.S. Dollar. It ended up falling by 3.10 percent. The Aussie’s underperformance comes as no surprise. This given deteriorating global sentiment rooted in Euro zone miscues. The negative outlook markets have collectively taken has weighed on the higher yielding currencies and other risk correlated assets, such as equity markets. Still, despite losing 7.89 percent against the Dollar already in November, there appears to be more room to the downside, even though a corrective bounce cannot be ruled out. The next support level is the October 4 low, at 0.9388.
Australian data has not been the reason for the currency’s decline. It has been deteriorating global sentiment. This past week, although market conditions were notably ‘thinner’ given Thanksgiving in the US, Euro zone debt fears crushed any good news. Also, fears of a hard Chinese landing flared again after data showed that Chinese manufacturing production fell to a 32 month low.
Also of note, the ever tightening liquidity evident in the financial markets has weighed on the Aussie. The Euribor-OIS 3-month spread, which happens to be the rate at which Euro zone banks lend unsecured funds to one another, is pushing highs not seen since 2009. Now, the last time the Euribor OIS 3-month spread was like this was the week after Lehman Brothers collapsed in September 2008.
Looking ahead, there is not much to be said in terms of market moving data that could alter the Aussie’s. A major bounce will only happen if the situation in Europe shows signs of improvement. The most important piece of data facing the Australian Dollar is Friday. This is when housing market data is due. Building approvals are forecasted to have contracted by 14.4 percent in October from the same period in 2010. This is an ominous sign that the Australian housing bubble may be about to burst. Lower Chinese demand for Australian goods coupled with a deflating housing sector will accelerate the Aussie’s gains going forward.
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