Australian Dollar Volatility to Continue on China, Jobs Data

The Australian Dollar succumbed to broad-based risk aversion last week, dropping the most in over four years against its US counterpart. China appeared to be the epicentre of negativity as policymakers attempted to implement a new circuit-breaker system for limiting stock-market volatility. The setup envisioned pausing trade for 15 minutes if shares sustained a loss of 5 percent and stopping it altogether at a loss of 7 percent.

Sharp intraday swings are not unusual for Chinese stocks, where trading is dominated by retail speculators with a focus on the short term. Circuit-breakers proved counter-intuitive in this environment, exerting a kind of magnetism on prices.

The dour mood deepened as China weakened the Yuan by the most since Augusts’ dramatic restructuring of the daily fix regime for the onshore exchange rate.

Spill over from Chinese turmoil into the broader markets appears to be driven by fears of instability in the world’s second-largest economy. This seems to be coupled with a general tendency toward risk aversion as the Fed begins to tighten monetary policy even as global growth decelerates.

On the domestic front, Employment data will be the main focus on Thursday. The economy is expected to have lost 10k jobs in December, marking the first negative figure in three months. The unemployment rate is seen ticking higher to 5.9 percent. Australia has increasingly improved relative to consensus forecasts over the past two months, hinting that analysts’ models are understating the economy’s improvement and opening the door for an upside surprise. Such an outcome may weigh against RBA rate cut speculation for February and boost the Aussie.

We also have the Official Bank rate in the UK on Thursday and Unemployment claims, PPI and retail sales out of the US to round out what looks to be another volatile week on world markets.

This morning AUD-USD has dropped below the 0.7000 mark and trading at 0.6960 as at 8am.