Australian Dollar a Risky Proposition, say ANZ Banking Group, "Sell the Rallies"

-AUD falls as trade fears sour risk appetites ahead of G7 summit. 

-ANZ Research say "sell rallies" as risk backdrop will remain perilous.

-ANZ Research say bet against AUD with "long" EUR/AUD trade idea. 

© Taras Vyshnya, Adobe Stock

The Australian Dollar could receive a boost if next week's data shows the Antipodean nation's labour market is shown improving further, according to strategists at ANZ Research, although they argue the Aussie unit remains a risky proposition and that traders should just "sell the rallies".

"In Australia, labour market conditions should continue to tighten, but given the risk backdrop remains vulnerable, we recommend using any strength to sell the rallies," says Giulia Lavinia Specchia, an FX strategist at ANZ Research, a division of Australia & New Zealand Banking Group.

Australia's unemployment rate is forecast by ANZ to fall back to a joint five year low of 5.5% when the Australian Bureau of Statistics releases the May jobless number at 02:30 am London time next Thursday.

"The NAB survey is expected to confirm domestic momentum remains strong and, more important, the labour report should show conditions continuing to tighten. If the unemployment rate drops, as we expect, the AUD should get a short-term boost," Specchia adds.

Above: AUD/USD rate shown at hourly intervals.

A fall in the unemployment rate could result in the Australian Dollar taking another leg higher as traders would likely speculate that a tightening labour market will soon see wages and inflation pick up, auguring expectations of an eventual interest rate rise from the Reserve Bank of Australia.

However, ANZ strategists argue that a small fall in unemployment will do little to alter the immediate inflation outlook and that the global "risk backdrop" is more of an important driver for the Australian Dollar, which is a commodity linked currency, at the moment. And that risk backdrop is one that currently makes getting behind the Aussie fraught with risk.

"The global environment will continue to dominate moves. While positive sentiment should see the AUD outperform, the threat of a trade war means it is hard to bank on a sustained relief rally. Risks around the housing market may also weigh on the Aussie," Specchia writes, in a recent note.

Above: Pound-to-Australian-Dollar rate shown at hourly intervals.

President Donald Trump's combative approach toward nations over perceived-unfair trade relationships has placed markets on edge in recent months, particularly after the White House targeted China, the EU, Canada and Mexico with a series of tariffs that have prompted fears of a so called trade war.

Friday and Saturday will see national leaders from the so called group of G7 nations meet to discuss a range of issues, although international trade is expected to feature heavily on the agenda. Already, French President Emmanuel Macron and Canadian Prime Minister Justin Trudeau have made a number of barbed remarks at a press conference ahead of the summit, drawing an angry rebuke from President Trump on Twitter. 

This sent markets into a "risk off" mood Friday, which saw the US Dollar rise broadly and risk currencies like the Australian Dollar fall. Any further trade-related spats that emerge over the weekend risk setting a glum mood at the beginning of the new week, which is already fraught with risk for markets. 

Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers. The EU trade surplus with the U.S. is $151 Billion, and Canada keeps our farmers and others out. Look forward to seeing them tomorrow.

— Donald J. Trump (@realDonaldTrump) June 7, 2018

"We have consistently highlighted that risk appetite and the USD (ie global factors) have been the primary drivers of the currency, rather than factors unique to the AUD," says Specchia. "This is evident by virtue of the fact that rolling regression of the AUD against the two major global drivers has little residual, which means there has been non idiosyncratic behaviour in the AUD."

Not only will President Trump meet with North Korean leader Kim Jong-Un in Singapore Tuesday 12, which could ultimately prove to be a positive for risk sentiment just as much as it could a negative, financial markets will also have to contend with US inflation figures for May and central bank meetings in both the US and Eurozone. 

So while the Aussie could plausibly receive a boost around the middle of next week when the labour data is released, there are enough risk factors on the boil in the current market to mean it is only a matter of time before events elsewhere in the world see the Australian Dollar succumb to renewed weakness.

Specchia and the ANZ team recommend clients use any rise in the Aussie as an opportunity to bet on renewed declines. They have have also advocated a "long" position in the EUR/AUD exchange rate, entering the trade aound 1.5492 and targeting a move up to the 1.6190 level, with a stop loss below 1.52.  

The EUR/AUD rate was quoted 0.22% higher at 1.5516 Friday while the AUD/USD rate was down 0.57% at 0.7572. The Pound-to-Australian-Dollar rate was 0.54% higher at 1.7711.

Above: Euro-to-Australian-Dollar rate shown at hourly intervals.

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