Like the little engine that can’t the Australian dollar has once again dropped below the 77 cents level this morning after the sell-off in US stocks overnight, according to Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
He added, “If markets are going to unwind the Trumponomics positivity the Aussie dollar’s rally is over.”
McKenna pointed out that as the outlook for growth, prices of commodities, interest rate differentials, and the US dollar are all fundamental drivers for the Australian dollar, so too is the ebb and flow of investor risk tolerance.
“And it’s how the Aussie dollar’s rally has been snuffed out for now as investor sentiment seems to be turning against Trumponomics,” he added.
According to McKenna, it is worth noting that the dip back to 77 cents support was flagged as a short term risk.
“It’s not a collapse though – neither for the Aussie or US stocks. But it is also worth discussing the linkage between the Aussie dollar and risk appetite,”
“That linkage comes from the role the Aussie dollar plays in global investors’ and traders’ portfolios,”
Australia is the world’s 12th or 13th biggest economy.
“But our currency is the world’s fourth or fifth most traded currency. That’s because traders and investors often use the Aussie as a proxy for overall global growth and specifically for Chinese growth also,” McKenna said.
He added, “That’s not to say domestic factors are not important. Obviously, they are. But when the stars align and traders are either ebullient or pessimistic this linkage magnifies any domestically induced cycles.”
And it’s precisely because the Aussie dollar is used in this way that it then becomes an outsized bet in traders and investors portfolios.
McKenna pointed out that’s particularly important if risk appetite wanes and markets experience a period of raised pessimism.
“Such a period usually means that traders and investors get closer to home, or their benchmark. That means they sell Aussie dollars,” he said.
He noted that the falls in US stocks already had an impact on risk assets like the Aussie dollar.
“My view is that if the markets unwind the Trumponomics rally then the Aussie dollar’s rally is over,” McKenna said.
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