Risk aversion: Invisible but it isn’t dead - Westpac

Sean Callow, Research Analyst at Westpac, suggests that the main revelation for markets in the past week is that risk aversion may have been almost invisible since November but it isn’t dead.

Key Quotes

“AUD/USD reached 0.7750 on Tuesday, its highest level since 9 November, just ahead of the US election surprise. Less than 24 hours later, the pair was testing 0.7640, a one week low.” 

“To be sure, this is not a dramatic move by the Aussie’s standards. But for some months, broad USD swings have been the overwhelming source of sharp AUD/USD moves, so it is noteworthy to see the pair tumble at the same time as US yields fell and the US dollar sank against EUR and JPY. As the chart shows, Dollar Index (with a large weighting for EUR and JPY) has been highly correlated with AUD/USD’s daily changes, a far better guide than the US stock market.”

“But it was difficult for the Aussie to ignore the steepest fall in the S&P 500 since the election, with US stocks having been unusually calm. The apparent catalyst for the stock slide was concern that the government’s healthcare legislation would be rejected by conservatives in President Trump’s own party, which at the very least would delay the tax reform and infrastructure boost that seemed to be the main driver of the postelection surge in stocks, USD and yields.”

"So much appears to be at stake when the House votes on the bill on Thursday. Passage of the bill (even narrowly) could mean the mid-week bout of risk aversion is quickly forgotten. Yet this would require passage in the Senate as well, which seems doubtful.”

“Ongoing turmoil in Washington DC seems likely to keep chipping away at long USD positions against EUR (especially), JPY and CHF. But AUD/USD only seems likely to break 0.7750 if equities regain their composure. The Aussie will remain a “good times” currency.”