The Australian dollar is looking shaky as volatility makes a comeback

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The Australian dollar put in a resilient performance on Monday, trading mixed against the major crosses despite another significant bout of financial market volatility and further strength in US economic data.

That Teflon-like performance could well be due to the raft of major market events that will arrive today in Australia.

Here’s the scoreboard as at 7.45am AEDT.

AUD/USD 0.7890 , -0.003 , -0.38%
AUD/JPY 86.31 , -1.01 , -1.16%
AUD/CNH 4.9762 , -0.0277 , -0.55%
AUD/EUR 0.6357 , -0.0004 , -0.06%
AUD/GBP 0.5640 , 0.0028 , 0.50%
AUD/NZD 1.0838 , -0.0018 , -0.17%
AUD/CAD 0.9865 , 0.0026 , 0.26%

With stocks tumbling in both Europe and North America, the Aussie fell heavily against the Japanese yen, reflecting the risk-off tone seen during the session.

However, the Aussie put in a far stronger performance against the other major crosses, posting gains against the British pound and Canadian dollar and modest declines against the Kiwi dollar and euro.

“Sterling came in for more selling from a combination of more Brexit chatter and a somewhat lower than expected reading on the Services PMI for January that came in at 53.0 after 54.2 against expectations of 54.1,” said David de Garis, Economist at the National Australia Bank.

The Canadian dollar was likely undermined by a sharp plunge in crude prices which fell by more than 1.5% for the session. While the Aussie is also tied to the oil price performance, strength in iron ore markets on Monday likely explains its outperformance against the CAD.

The euro was weighed down by comments from ECB President Mario Draghi who told European lawmakers that “new headwinds have arisen from the recent volatility in the exchange rate, whose implications for the medium-term outlook for price stability require close monitoring”.

After logging its largest one-day percentage decline since May 2017 on Friday, the AUD/USD continued to lose ground, weighed down by weakness in stocks and an incredibly strong US non-manufacturing PMI report for January released by the ISM.

At 59.9, the PMI hit the highest level since August 2005, boosted by strong readings on new orders and employment. A reading above 50 indicates that activity levels improved from a month earlier with the distance away from this level indicative of how fast the improvement was.

The new orders subindex jumped 8.2 points to 62.7, leaving it at the highest level since January 2011. As a lead indicator on activity levels in the future, this is a strong signal that activity levels could strengthen even further. Indeed, the separate employment subindex surged 5.3 points to the highest level on record.

Combined with the risk-off tone seen during the session, that saw the AUD/USD pull back having hit a high of .7953 in European trade.

At .7890, the AUD/USD currently sits at the lowest level since January 12.

AUD/USD 5-Minute Chart

Turning to the session ahead, there’s a plethora of major data releases scheduled in Australia that carry the potential to shift the Aussie.

At 11.30am AEDT, the ABS will release Australian retail sales and international trade figures for December.

Retail sales are tipped to decline by 0.2% having surged by 1.2% in November on the back of Black Friday and iPhone sales. The ABS will also release quarterly retail sales volumes, an input that will feed into household consumption in Australia’s upcoming Q4 GDP report. Volumes, adjusted for price movements, are expected to lift by 1%, providing a welcome boost to consumption having risen by a paltry 0.1% in Q3.

Retail volumes accounts for around 30% of household consumption. Household consumption accounts for just shy of 60% of Australian GDP.

For the international trade report, a surplus of $200 million is expected, partially reversing the shock $628 million deficit recorded in November. Along with the headline figure, watch for revisions to previous data — they can and do happen, and often by quite a lot.

Aside from the data releases, the other main event today comes from the RBA with the release of its February interest rate decision. While no change in rates is likely, there’s likely to be plenty of interest in the accompanying monetary policy statement.

The decision will be announced at 2.30pm AEDT. This 10-second guide has more on what to look out for.

Outside of Australia, other highlights today include German industrial orders, the latest GDT Dairy auction (always important for NZD traders) along with international trade figures from the US and Canada.

It goes without saying, but even with the stacked Australian data calendar, that could easily be overlooked should the selloff in risker assets continue in the Asian session.

At this point, it looks like it will.

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