The Aussie is back below 0.98 this morning after taking a minor battering overnight. Not helping matters was the latest swing towards risk avoidance, in part triggered by a report in the Asian press claiming that Chinese policy officials were not contemplating a sizeable fiscal stimulus in response to the recent deterioration in the economy. Risk appetite was also tempered by various reports suggesting that the ECB has ruled out controversial plans mooted by the Spanish government for the rescue of Bankia.
Domestically, the economy continues to struggle as well, with retail sales declining by 0.2% last month. Indeed, excluding food, retail sales actually declined in real terms in the year to April. Aussie consumers have been hibernating for some time now, beset by falling real income growth, a moribund labour market, declining house prices and falling wealth. It remains a close call as to whether the RBA will lower the cash rate again when they meet next week, having already reduced it by 50bp just four weeks ago.
Perpetuating the Aussie’s demise this month has been a dramatic capitulation on the part of traders. From a significant net long position in the Aussie in the first week of this month, traders and short-term speculators have switched to their largest net short position for almost four years. Unfortunately, this is likely to be the new normal for the AUD over coming months. For the first time in a very long while, the Australian currency may now be a sell-on-strength, rather than a buy-on-weakness.