Australian dollar outlook 06/01/2011

Australia: The Australian dollar has fallen back below parity this morning following strong buying of the USD overnight. Positive data out of the US has provided some hope that the US economic recovery may finally be getting some traction, pushing US yields higher and increasing the attractiveness of USD assets. Adding to the selling pressure on the AUD is speculation surrounding the impact of the QLD floods on Australia’s GDP figures. While at this stage it is difficult to gauge the magnitude of the economic impact of the floods, there is talk that Australia’s first quarter GDP could be affected by between 0.5 to 0.7% due to lost export revenue.

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Majors. The outlook for the USD is looking increasingly positive following strong US data releases and ongoing problems in the Euro-zone. The US economy may finally be turning the corner and we could be seeing the first signs of a turn-around in US interest rates. Should US yields continue to edge higher this will begin to erode the relative attractiveness of other higher yielding currencies, such as the AUD and other commodity currencies. The employment report released overnight showed that companies in the US increased payrolls by 297,000 in December, nearly triple the number the market had been expecting. US service industries also expanded in December with the Institute for Supply Management’s non-factory index rising from 55.00 in November to 57.1 in December. Investing in the US also appears to be a more attractive proposition than investing in Europe at the moment given the ongoing sovereign debt concerns. Some economic commentators are now even calling for EUR/USD to head down through parity. As a result of the stronger USD most of the base metals were lower, with spot gold declining 0.3%.