Australian Dollar's Double Jeopardy

This week it feels like the AUD was punished twice for what is essentially the same "crime". On Monday morning Asian time, the Producer Price Index (PPI) disappoints, coming out 0.6% lower than expected. The Australian dollar promptly sells off against the USD and JPY. This makes perfect sense - lower PPI generally feeds into lower inflation, thus an increased likelihood of a rate cut at the next RBA meeting. So far so good.

Overnight, SPX stabilizes and most "risk" currencies bounce a little in line with the equity market. On Tue morning Asian time, Australia's Consumer Price Index disappoints by a roughly equivalent amount. On this data release, the AUD drops again.

Australia's Markets Defying Gravity (For Now)

Today the Aussie employment numbers surprised on the negative side. About 30k jobs were lost in December according to the Australian Bureau of Statistics press release. This compares to a consensus estimate of a net creation of 10k jobs, for a negative surprise of -40k. Both the Aussie stock index and the Aud/Usd fx rate met this with slightly more than a yawn.

The -40k surprise may not seem like a whole lot, but normalized by population size (22mm in Australia vs 310mm in the United States) this would be equivalent to US payrolls disappointing by approx 560k and such news would have completely tanked the SPX!

The Aussie (the currency that is) has been trading in line with global risk sentiment and out of synch with the fundamentals of the local economy. Other currencies have done that in the recent past, most notably the Euro. However when the regime shifts and the market starts pricing in the negative fundamentals the moves can be quite large. We just need to wait for the decoupling.