The Australian dollar is back near the .79 cents level as it recovered from a jittery session over the weekend.
“We saw the Aussie dollar hit a low of .7838 last week when traders were a little worried about what RBA Governor Philip Lowe would say about its recent strength,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
However, McKenna pointed out that traders and investors’ attention has now shifted to the escalating tension created by North Korea.
“Naturally how the rhetoric, tensions, and heaven forbid action, flow in around North Korea will remain a key and critical factor for forex traders this week,” he said.
“You have to wonder what game Kim Jong-un is playing right now as he seems to both back himself into a corner and goad the Americans into a response,” he added.
McKenna’s view is that: “A further escalation would undermine risk assets like the Australian dollar,”
“Increased volatility and geopolitical tensions aren’t usually good for the Aussie dollar, he added.
Fear index rising
Investor risk appetite is always important for the Australian dollar. Under current circumstances with North Korea and stocks swooning a little, traders will be watching closely.
That’s particularly the case after the breakout of the VIX last week from around 9 to 15.5 by week’s end.
Aussie dollar and Yuan both strong
With the release of important Chinese data on retail sales, investment and industrial production today and the RBA board minutes out tomorrow, McKenna said investors will be keeping an eye on the strength of the numbers.
“We know two things about these events. That is, Chinese and Australian growth has confounded the doomsayers with strength over recent months and their respective Citibank Economic Surprise indexes sit at +41.3 and +44.8 respectively,” McKenna said.
“Hence the strength of both the Yuan and Aussie versus the US dollar,”
He pointed out that “The currency strength has risks for both economies.”
McKenna said that while Governor Lowe said he’s not interested in intervention as a policy tool to restrain the Australian dollar right now, “There has to be a strong chance that the minutes of the RBA meeting earlier this month reflect a discussion of the impact higher Aussie dollar on the economy.”
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