Global Markets

Volatility down under

17 April, 2014 | Posted By: Oren Laurent

By Oren Laurent
President, Banc De Binary

Last week, I speculated why tech stocks, despite a lack of fundamental causes, experienced a temporary decline. This week, the movement of the Aussie dollar provides further proof of the short-term power of investor sentiment over market trends. What is driving this sentiment? And what are the fundamentals telling us?
On Thursday, April 10, futures traders went bullish on the Aussie dollar, causing the currency to reach 9% higher than its 3.5 year low experienced in January. The shift was led by better than expected Australian domestic data, with the Australian Bureau of Statistics reporting a total of 18,100 new jobs in March and the unemployment rate falling to 5.8%.
In recent months, the Australian dollar has been one of the top-performing G10 currencies. It has rallied more than 5% against its U.S. counterpart this year thanks to a number of weak economic signs from the States combined with the shift of the Reserve Bank of Australia to a neutral monetary policy in February. At first glance, the employment data could be interpreted as another factor driving gains, but a deeper examination reveals that the recent rise goes against the trend, since a reversal in the currency’s strength is looking increasingly imminent.
Consider that the rally occurred despite increased tensions in the Ukraine and concerns about a possible slowdown in the property market in China, Australia’s biggest trade partner. It occurred even though China’s producer price index declined 2.3% in March and exports were down 6.6% compared with one year before. And it occurred in spite of the fall of Australian business confidence in March to the lowest rate since September’s Federal election.
Clearly, employment figures do not paint a full picture of the economy. They were simply enough to influence public sentiment and create short-term optimism to further pump up the market. Call me biased, but the power of investor sentiment and the effect that certain fundamental events exert over short-term movements, even when contradictory to larger trends, is precisely why traders should include short-term binary option positions in their portfolio, such as are offered by Banc De Binary.
In the long-term though, more likely than not, the bigger-picture fundamentals will reign. Indeed, the employment data was not strong enough to sustain the currency’s extra height and Thursday’s gains were lost the following day. It slipped on April 11 to below U.S. 94c. If U.S. companies perform better in the coming months, as many analysts are now forecasting, this could further reverse the trend.
Steven Englander, Global Head of G10 FX Strategy at Citigroup, made the point that investors have been buying the Australian currency in anticipation of a turnaround in the near future, since “the global environment isn’t going to support much more gains.”
I wouldn’t be surprised to see a degree of volatility in the markets as investor sentiment and various fundamentals test their weight and influence. I also wouldn’t be surprised if by the end of the second quarter, the currency has stabilized at a few cents lower than it stands today. Traders will do well to follow events in China and the U.S., as well as of course local Australian data, before committing to any market positions.