Gold Sharply Higher on Bargain Hunting, Short Covering, and Some Fresh Safe-Haven Demand

Gold prices are trading sharply higher and hit a two-week high in early U.S. dealings Tuesday. Heavy short covering, bargain hunting and even some fresh safe-haven demand are featured. The near-term technical posture in gold has also improved a bit Tuesday.

April Comex gold last traded up $18.00 at $1,596.00 an ounce. Spot gold was last quoted up $14.90 at $1,597.25.  May Comex silver last traded up $0.452 at $29.31 an ounce.

The stronger U.S. dollar index and U.S. Treasury prices Tuesday morning, along with weaker U.S. stock indexes, suggest investor risk appetite has pulled back a bit so far on the day. The solid jump in gold prices early Tuesday does hint that the “risk-off” day in the market place has attracted some fresh safe-haven investor demand for the yellow metal.

In overnight news, Spanish and Italian bond yields held steady following successful government debt auctions in both countries Tuesday. However, the Italian bond auction did see the government’s borrowing costs rise to a three-month high, reports said. The auctions came after the Fitch ratings agency last Friday downgraded Italy’s credit rating. Another Italian bond auction is slated for Wednesday.

The U.S. dollar hit a 3.5-year high against the Japanese yen overnight amid reports the Bank of Japan will continue on its aggressive monetary policy easing path. Asian stock markets were pressured again Tuesday following the recent spate of Chinese economic data that hints at slowing growth and rising inflationary pressures.

The U.S. dollar index is firmer Tuesday morning and hovering near a seven-month high scored last Friday. The U.S. dollar bulls have solid technical strength to suggest the dollar index can continue to trend higher in the near term. That continues to be a bearish underlying factor for gold and silver. Meantime, Nymex crude oil futures prices are near steady Tuesday. The crude oil bears still have the near-term technical advantage, and that’s also a negative for gold and silver prices.

U.S. economic data due for release Tuesday includes the Manpower quarterly U.S. employment survey, the NFIB small business optimism index, and the weekly Goldman Sachs and Johnson Redbook retail sales reports.

The London A.M. gold fixing is $1,582.50 versus the previous London P.M. fixing of $1,579.00.

Technically, April gold futures prices on Tuesday have seen a bullish upside “breakout” from the sideways trading range of the past two weeks. The bulls on Tuesday did gain some fresh upside near-term technical momentum even though the bears still have the overall near-term technical advantage. The gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at $1,619.70. Bears' next near-term downside breakout price objective is closing prices below solid technical support at the February low of $1,554.30. First resistance is seen at $1,600.00 and then at $1,610.00. First support is seen at $1,585.80 and then at the overnight low of $1,578.80.

May silver futures hit a fresh two-week high in early trading Tuesday. The bears have the overall near-term technical advantage, but the bulls are regaining a bit of upside momentum. Bulls’ next upside price breakout objective is closing prices above solid technical resistance at $29.495 an ounce. The next downside price breakout objective for the bears is closing prices below solid technical support at $27.925. First resistance is seen at $29.495 and then at $29.75. Next support is seen at $29.00 and then at the overnight low of $28.87.

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News Source: www.reuters.com

GOLD OUTLOOK: Watch Retail Sales Data, Technical Chart Levels For Gold Next Week

After a much stronger-than-expected U.S. employment report, market analysts said they will keep an eye out for further proof of economic strength in the U.S., with the February retail sales seen as a harbinger. Market watchers have been looking for signs so see whether the higher taxes in the U.S. have pinched consumers’ spending habits.


Additionally, participants are keeping an eye on the $1,550 to $1,560s an ounce area for Comex April gold futures after the market held support in this region. April gold futures ended on firmer Friday, settling at $1,576.90 an ounce on the Comex division of the New York Mercantile Exchange, rising 0.293%, on the week. Most-active May silver ended higher on the day, settling at $28.948, up 1.61% on the week.

 In the  News Gold Survey, out of 33 participants, 25 responded this week. Of those 25 participants, six see prices up, while nine see prices down, and 10 see prices moving sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Gold initially fell after a much stronger-than-expected U.S. unemployment report for February. According to the Labor Department, 236,000 jobs were created last month and the unemployment rate fell two percentage points to 7.7%, a five year low.

Several analysts said that the data suggest the initial worries about tax hikes and spending cuts that went into effect in January might not have scared off employers. Also, others pointed out the increase in construction jobs matches the strength in housing data, which has also come in stronger than expected.

Gold found support just above last month’s low of $1,554 and rebounded when stocks sold off following a rise in wholesale inventories but held much of the session just above unchanged.
Rich DeFalco of 76 Partners said the jobs figure was a game-changer for him and his view on gold. “If you had asked me yesterday, I would have said up. Today, I’m totally bearish. There are too many things working against it. That unemployment number was shocking,” he said.
He said with U.S. Treasury yields and the U.S. dollar rising on the economic news, some of the market events that have been supportive for gold aren’t anymore. “It’s the opposite of the last three to four years,” he said.

After strong employment and jobs data, market watchers said next week the critical report will be retail sales as that will give a sense of how Americans are spending – or not – money in the face of higher taxes and gasoline prices. MarketWatch calls for a rise of 0.4% in retail sales.
DeFalco isn’t so sure, especially with higher gas prices. “With gas prices near $4 a gallon, it cuts into people’s disposable income…  People don’t have as much to spend on entertainment. (Winston) Churchill said ‘we drink in victory and we drink in defeat’ but we don’t drink as much when gas is $4 a gallon,” he said.

Gold analysts said they’re going to keep an eye on Asian buying, which traditionally has been a strong support for gold. Volumes on the Shanghai Gold Exchange are strong, although premiums have fallen. UBS said the fall in premiums may be the result of easing of some supply bottlenecks, rather than reduced demand.

“Should volumes remain strong in the days and weeks ahead, this would mean that this year China is forgoing the historical pattern of a slowdown in gold activity after the Lunar New Year. March is typically a strong month in terms of gold trading on the SGE,” UBS said.
Analysts said they’ll also watch the resumption of Indian wedding season in April to see what the appetite for gold is after recent strength in the rupee.
Frank Lesh, futures broker at FuturePath Trading, said it’s possible that gold could continue to hold in this range as it mulls its next direction.

“Gold has spent the past week in consolidation, unable to penetrate resistance of $1,590, but able to hold above the low of $1,554 from two weeks ago. The technical picture is still negative, but at least the liquidation pressure has subsided, for now. Dollar strength and the perception that QE (quantitative easing) could end sooner - due to the improving economic picture - rather than later remain limiting factors for gold. It was investment demand that took this market to contract highs and I continue to wonder what catalyst will bring that demand back. I expect a sideways market and further consolidation for next week,” he said.

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Italy could reignite euro crisis.

Can the Italians be serious? That is likely to be the reaction of financial markets and the country’s euro zone partners as they ponder a disastrous election result, which could reignite the euro crisis. More than half of those who voted chose one of two comedians: Beppe Grillo, who really is a stand-up comic; and Silvio Berlusconi, who drove Italy to the edge of the abyss when he was last prime minister in 2011. Both are anti-euro populists.
This comedy could easily end in tragedy. The inconclusive result has echoes of last year’s first Greek election – except that Italy is bigger and more strategic. The country faces political paralysis, while its economy is shrinking and its debt is rising. The European Commission forecast last week that GDP would fall a further 1 percent this year after last’s year 2.2 percent drop. Debt, meanwhile, would reach 128 percent of GDP by the end of this year.
The euro crisis went into remission after the European Central Bank’s president Mario Draghi promised last summer to do “whatever it takes” to preserve the single currency. But, if Italy proves ungovernable during this critical time, even the ECB’s safety net may not work.
Investors are already getting nervous. Italian 10-year bond yields jumped 0.4 percentage points to 4.7 percent on Tuesday morning. Spanish yields also rose 0.2 percentage points to 5.3 percent, in the first sign of contagion. These are, though, admittedly still a far cry from the 7 percent-plus yields when the crisis was raging last July.
The risk is not that Berlusconi or Grillo will be prime minister. It is rather than nobody will be able to form a stable government. The electorate split into three roughly equal groups: Berlusconi’s centre-right group, Grillo’s uncategorisable 5-Star Movement and the centre-left coalition led by Pier Luigi Bersani. The centrist coalition led by Mario Monti, the technocratic who saved Italy from Berlusconi’s antics but whose austerity policies were deeply unpopular, came a poor fourth.
Italy’s convoluted electoral system gives the coalition with the largest number of votes an automatic majority in the lower house of parliament. This means Bersani will get the first chance to be prime minister, even though his coalition beat Berlusconi’s only by a whisker.
However, a different electoral system in the Senate, which has equal power as the lower house, means nobody will have a majority there. Bersani will not even be able to form a government in alliance with Monti – a scenario which pre-election polls had suggested was a likely outcome. At least Greece has only one house of parliament.
So what happens next? One idea is that Bersani could team up with Berlusconi to form a new grand coalition. This, though, seems unlikely given how they stand for completely opposite policies – unless Italy is dragged right to the brink. It’s also hard to see who would run such a government. If Monti hadn’t made the terrible mistake of running in the election, he would have been the natural choice. But his credibility has been shot to bits.
Grillo has said he won’t form a coalition with anybody, so a formal alliance with him isn’t an option. But Bersani could conceivably try to govern on his own, getting support on a case-by-case basis from the comedian. That, though, would be a recipe for extremely weak government.
Another option is a fresh election, as there was in Greece last year. Indeed, it’s hard to see how a new ballot can be avoided. The snag is that it isn’t obvious this would resolve the deadlock given that there are three roughly equal forces which don’t want to work together.
Some pundits think a solution could be to change the electoral system. That could conceivably clear away the old political caste, preparing the way for new parties and new leaders such as Matteo Renzi, the young centrist mayor of Florence. But Italy’s parliament has been debating new voting rules for years without coming to a conclusion and it may find it tough to reach consensus now.
Meanwhile, investors will give their verdict. A key question is whether Italy can still rely on the ECB’s support – its promise to buy potentially unlimited quantities of sovereign bonds. While this a very powerful drug, it contains important fine print: the ECB will only engage in so-called “outright monetary transactions” if the country concerned agrees to a reform programme with its euro zone partners.
It is hard to see Italy being able to sign such a programme without a stable government – which means the safety net has holes in it. If investors start thinking this way, bond yields could spiral upwards and capital flight could resume. The prospect of crisis could become a self-fulfilling prophecy.
Contagion could return with a vengeance too. Other countries may have more stable governments than Italy. But Spain, Greece and even France share its problems of a shrinking economy, rising debt and increasing popular anger against austerity. The longer recession bites, the greater the appeal of populist policies. Investors may worry anew that the race between populism and the return of growth will be lost across the euro zone.
A market fright could, of course, restore Italian voters to their senses when and if there’s a second election. That is what happened in Greece last year. But the next few months could be extremely jumpy and a happy outcome is not sure.

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Earnings to Watch (31/01/2013) Thursday BMO:

Earnings to Watch (31/01/2013)

Thursday BMO:

Altria Group Inc. (NYSE: MO) is engaged in the manufacture and sale of cigarettes and certain smokeless products in the U.S. The company has a market capitalization of $67.74 billion. It is expected to report FY 2012 fourth-quarter EPS of 55 cents on revenue of $4.33 billion, compared with a profit of 50 cents a share on revenue of $4.35 billion in the year-ago period. The analysts' consensus full-year forecast calls $2.21 per share earnings on revenue of $17.4 billion. That compares to $2.05 per share and $16.62 billion in the previous year. Altria Group is trading at around $33.45 a share. Over the past 12 months, the stock has gained 16.6 percent.

The Blackstone Group L.P. (NYSE: BX) is a manager of private capital and provider of financial advisory services. The company has a market capitalization of $22.61 billion. It is expected to report FY 2012 fourth-quarter EPS of 47 cents on revenue of $1.1 billion, compared with a profit of 40 cents a share on revenue of $925.01 million in the year-ago period. The analysts' consensus full-year forecast calls $1.64 per share earnings on revenue of $3.93 billion. That compares to $1.25 per share and $3.28 billion in the previous year. The Blackstone Group is trading at around $18.22 a share. Over the past 12 months, the stock has gained 14.5 percent.

Cameron International Corporation (NYSE: CAM) provides flow equipment products, systems and services to worldwide oil, gas and process industries. The company has a market capitalization of $14.98 billion. It is expected to report FY 2012 fourth-quarter EPS of 96 cents on revenue of $2.38 billion, compared with a profit of 77 cents a share on revenue of $2.03 billion in the year-ago period. The analysts' consensus full-year forecast calls $3.14 per share earnings on revenue of $8.45 billion. That compares to $2.67 per share and $6.96 billion in the previous year. Cameron International Corporation is trading at around $60.72 a share. Over the past 12 months, the stock has gained 13.8 percent.

Colgate-Palmolive Company (NYSE: CL) is a consumer products company. The company has a market capitalization of $52.04 billion. It is expected to report FY 2012 fourth-quarter EPS of $1.4 on revenue of $4.31 billion, compared with a profit of $1.3 a share on revenue of $4.17 billion in the year-ago period. The analysts' consensus full-year forecast calls $5.36 per share earnings on revenue of $17.12 billion. That compares to $5.03 per share and $16.73 billion in the previous year. Colgate-Palmolive is trading around $110.15 a share. Over the past 12 months, the stock has gained 23.8 percent.

The Dow Chemical Company (NYSE: DOW) is a diversified manufacturer and supplier of products used primarily as raw materials in the manufacture of customer products and services worldwide. The company has a market capitalization of $41.47 billion. It is expected to report FY 2012 fourth-quarter EPS of 34 cents on revenue of $13.7 billion, compared with a profit of 25 cents a share on revenue of $14.1 billion in the year-ago period. The analysts' consensus full-year forecast calls $1.91 per share earnings on revenue of $56.56 billion. That compares to $2.54 per share and $59.99 billion in the previous year. The Dow Chemical Company is trading around $34.58 a share. Over the past 12 months, the stock has gained 3.6 percent.

Dunkin Brands Group Inc. (Nasdaq: DNKN) is a franchisor of restaurants serving coffee and baked goods, as well as ice cream within the quick service restaurant segment of the restaurant industry. The company has a market capitalization of $3.89 billion. It is expected to report FY 2012 fourth-quarter EPS of 33 cents on revenue of $170.79 million, compared with a profit of 30 cents a share on revenue of $168.51 million in the year-ago period. The analysts' consensus full-year forecast calls $1.27 per share earnings on revenue of $667.47 million. That compares to 94 cents per share and $628.2 million in the previous year. Dunkin Brands Group is trading around $36.85 a share. Over the past 12 months, the stock has gained 38.9 percent.

Mastercard Inc. (NYSE: MA) is a global payments and technology company. The company has a market capitalization of $64.68 billion. It is expected to report FY 2012 fourth-quarter EPS of $4.82 on revenue of $1.89 billion, compared with a profit of $4.03 a share on revenue of $1.73 billion in the year-ago period. The analysts' consensus full-year forecast calls $22.01 per share earnings on revenue of $7.39 billion. That compares to $18.7 per share and $6.71 billion in the previous year. Mastercard is trading around $519.42 a share. Over the past 12 months, the stock has gained 52.47 percent.

Time Warner Cable Inc. (NYSE: TWC) is a provider of video, high-speed data and voice services in the U.S. The company has a market capitalization of $30.36 billion. It is expected to report FY 2012 fourth-quarter EPS of $1.55 on revenue of $5.5 billion, compared with a profit of $1.31 a share on revenue of $4.99 billion in the year-ago period. The analysts' consensus full-year forecast calls $6.69 per share earnings on revenue of $21.41 billion. That compares to $4.56 per share and $19.68 billion in the previous year. Time Warner Cable is trading around $100.6 a share. Over the past 12 months, the stock has gained 45.7 percent.

United Parcel Service Inc. (NYSE: UPS) is a package delivery company that operates in the U.S. less-than-truckload industry, and the provider of global supply chain management solutions. The company has a market capitalization of $78.66 billion. It is expected to report FY 2012 fourth-quarter EPS of $1.38 on revenue of $14.44 billion, compared with a profit of $1.28 a share on revenue of $14.17 billion in the year-ago period. The analysts' consensus full-year forecast calls $4.58 per share earnings on revenue of $53.99 billion. That compares to $4.23 per share and $53.11 billion in the previous year. UPS is trading at around $82.45 a share. Over the past 12 months, the stock has gained 9.3 percent.

Viacom Inc. (NASDAQ: VIAB) is an entertainment content company. The company has a market capitalization of $29.64 billion. It is expected to report FY 2013 first-quarter EPS of 91 cents on revenue of $3.52 billion, compared with a profit of $1.06 a share on revenue of $3.95 billion in the year-ago period. Viacom is trading at around $59.02 a share. Over the past 12 months, the stock has gained 23.9 percent.

Xcel Energy Inc. (NYSE: XEL) is a holding company with subsidiaries engaged primarily in the utility business. The company has a market capitalization of $13.43 billion. It is expected to report FY 2012 fourth-quarter EPS of 28 cents on revenue of $2.93 billion, compared with a profit of 29 cents a share on revenue of $2.57 billion in the year-ago period. The analysts' consensus full-year forecast calls $1.81 per share earnings on revenue of $10.6 billion. That compares to $1.72 per share and $10.66 billion in the previous year. Xcel Energy is trading at around $27.55 a share. Over the past 12 months, the stock has gained 3.6 percent.

Aetna Inc. (NYSE: AET) is a diversified health care benefits company. The company has a market capitalization of $16.64 billion. It is expected to report FY 2012 fourth-quarter EPS of 95 cents on revenue of $8.97 billion, compared with a profit of 97 cents a share on revenue of $8.54 billion in the year-ago period. The analysts' consensus full-year forecast calls $5.15 per share earnings on revenue of $35.56 billion. That compares to $5.17 per share and $33.61 billion in the previous year. Aetna is trading at around $49.76 a share. Over the past 12 months, the stock has gained 13.8 percent.

Thursday AMC:

Standard Pacific Corp. (NYSE: SPF) is a geographically diversified builder of single-family attached and detached homes. The company has a market capitalization of $1.79 billion. It is expected to report FY 2012 fourth-quarter EPS of 7 cents on revenue of $372.87 million, compared with a profit of 4 cents a share on revenue of $293.16 million in the year-ago period. The analysts' consensus full-year forecast calls 19 cents per share earnings on revenue of $1.19 billion. That compares to a loss of 5 cents per share on revenue of $882.99 million in the previous year. Standard Pacific Corp. is trading at around $8.44 a share. Over the past 12 months, the stock has gained 107.4 percent.

Bernanke downplays inflation risk of QE3

Worst thing Fed could do would be to hike rates prematurely

Federal Reserve Chairman Ben Bernanke played down fears on Monday from some more hawkish central bankers and investors that the Fed’s bond-buying program will lead to higher inflation.

“I don’t believe significant inflation is going to be the result of any of this,” Bernanke said in a speech at the University of Michigan. 

The Fed will watch closely to see whether the zero-interest rate policy that has been in place for four years could eventually lead investors to make unwise decisions, creating an asset bubble, he added.

Bernanke also said there is a continuing debate over whether Fed policy is a cause of asset bubbles. The Fed has an “open mind” on the issue, he remarked, and will continue to monitor markets and toughen bank supervision to guard against financial instability. 

But the worst thing for the central bank to do would be “to raise interest rates prematurely,” according to Bernanke. 

At their meeting in December, the Fed boosted its stimulus program by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion in mortgage-backed securities a month.

Last week, several Fed officials expressed their concerns over the central bank’s loose policy. Read: Fed hawks get their day in the sun. 

Kansas City Fed Bank President Esther George noted that prices of assets such as bonds, agricultural land and high-yield and leveraged loans were at historically high levels.

In addition, Richmond Fed President Jeffrey Lacker dissented from all eight Fed policy statements in 2012, saying that the central bank might be undermining its ability to control inflation.

U.S. could hit debt limit in mid. Feb.: Geithner

WASHINGTON (MarketWatch) -- Treasury Secretary Timothy Geithner on Monday said the debt ceiling would be reached between mid-February and early March unless Congress acted to raise it. The U.S. would have hit the debt limit in December but Treasury took several accounting moves to delay it. Geithner's estimate, contained in a letter to Congressional leaders, updated his earlier, more general, estimate from December that the extraordinary measures would delay the debt ceiling for two months. Geithner said Treasury would provide a more targeted estimate at a later date. There is a lot of uncertainty given the tax filing system, he said.

Six killed in UAE road accidents

• 
  Thinkstock/Getty Images - Six people, including two women, were killed in traffic accidents in Dubai, Sharjah and Ras Al Khaimah (RAK) over the weekend, UAE daily Gulf News reported on Sunday.

Six people, including two women, were killed in traffic accidents in Dubai, Sharjah and Ras Al Khaimah (RAK) over the weekend, UAE daily Gulf News reported on Sunday.

Two women were killed and three others were wounded in a deadly road accident in RAK.

According to Colonel Abdullah Al Munkis from RAK police, the accident happened on Friday night at Al Jazeera Al Hamra Road, when the car driven by a 42-year-old Arab woman suddenly swerved onto the side of the road. The woman was accompanied by her 14-year-old daughter and her three friends, who are sisters, as they headed for a picnic.

The mother and the daughter, who were sitting in the front seat, were killed on the spot, while the three sisters were immediately taken to the hospital, the report said.

Meanwhile, a 19-year-old Emirati man died on the spot on Friday evening in a traffic accident at the Awafi area of RAK and two others sustained serious injuries.

In Dubai, two Indian men were killed and three were critically injured in an accident on Al Khail Road on Saturday morning.

The injured are fighting for their lives in hospital. They were travelling in a car, which skidded off the road and crashed into a lamp post on the side of the road.

The 40-year-old driver lost control of the vehicle due to speeding and slippery road conditions, Gulf News reported, citing a police report.

In Sharjah, a truck driver died when his truck crashed into University Bridge on the Sharjah-Maliha road.

U.S. Dec. budget deficit $260 million: Treasury

The U.S. government ran a budget deficit of $260 million in December, the Treasury Department reported Friday, bringing the total shortfall for the first quarter of fiscal 2013 to $292 billion.

 Receipts in December were $269.5 billion, while the government spent $269.7 billion in the month. Year to date, the deficit is 9% lower than in the first three months of the prior fiscal year. The U.S. government's fiscal year runs from October to September.

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A Quick Glance at News (20/12/2012)

Talks to avoid a U.S. fiscal crisis stalled on Wednesday as President Barack Obama accused opponents of holding a personal grudge against him while the top Republican negotiator called the president "irrational."

The Bank of Japan delivered its third dose of monetary stimulus in four months on Thursday in a prelude to more aggressive action next year, as it faces intensifying pressure from the country's next leader for stronger efforts to beat deflation.

The yen languished near 20-month lows against its U.S. peer on Thursday, but trading was choppy in thin conditions with yen bears possibly suffering a case of cold feet as the Bank of Japan's policy decision loomed.

The Bank of Japan has already shown its readiness to keep an ultra loose monetary policy but stressing its resolve to ease "unlimitedly" would make a difference, a senior Liberal Democratic Party (LDP) official said on Thursday.

Asian shares retreated from near 17-month highs on Thursday and commodities fell as negotiations to avert a U.S. fiscal crunch turned to personal taunts, putting at risk a timely solution as well as the health of the world's largest economy

U.S. stocks sold off late in the day to close at session lows on Wednesday as talks to avert a year-end fiscal crisis turned sour, even as investors still expect a deal.

Asia’s benchmark equities index has risen about 14 percent this year as central banks from the U.S., Europe, Japan and China took action to spur economic growth

The gauge traded at 14.7 times average estimated earnings compared with 13.8 for the Standard & Poor’s 500 Index and 12.8 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg

Australia’s government said it’s unlikely to deliver a pledged budget surplus this fiscal year as weaker growth and a strong local currency curb tax receipts, a setback for Prime Minister Julia Gillard before an election due in late-2013.

Oil fell from the highest level in two months in New York on speculation its four-day gain was exaggerated as budget negotiations faltered in the U.S., threatening the economy of the world’s biggest crude user.

Australian stocks advanced on Thursday, building on highs not seen since July 2011. The S&P/ASX 200 index edged up 0.1% to 4621.50, with most sectors trading higher.

Where next for the Australian dollar?

SYDNEY (Market Watch) — The Australian dollar has survived a drop in commodity prices and lower interest rates this year, but will the world’s fifth-most-traded currency head lower in the new year? 

The “aussie”— which accounts for around 7% of global foreign-exchange trade — presently trades well over the $1.05 mark, near where it started the year. 

Relatively high domestic interest rates, a triple-A credit rating and an outperforming economy have laid the foundations for the currency’s strength over the last few years, after it started 2009 at around 70 U.S. cents.

It stumbled mid-year to as low as 96 U.S. cents, when a drop in commodity prices raised questions about the future strength of Australian exports, and downward pressure on interest rates eroded some of its yield advantage against rivals. 

Since then, however, iron-ore prices are off their worst levels, thanks to signs that China’s economy is stabilizing, and while interest rates are still well above levels found in many other developed world economies. But analysts say these issues alone don’t fully explain the recent revival in the Australian currency’s fortunes. 

“The simplest answer is that some other factor matters more, and the likely candidate is the risk-on/risk-off dynamic,” HSBC currency strategists said in a recent research note.

“Even a cursory glance at the evidence suggests a strong and consistent relationship between the Australian dollar-U.S. dollar pair and the performance of the U.S. equity market, in turn a reliable proxy for the wider risk-on/risk-off phenomenon,” the strategists said. 

From 2009, the Australian dollar’s rate against the U.S. currency has shown a more than 75% correlation with moves in the S&P 500 according to HSBC’s research. 

Fed matters

Risk-on/risk-off trading in the last few years has in itself largely resulted from massive central-bank liquidity injections into financial markets, where the sheer weight of money has created its own trading force. Money has found a home in many assets, pushing prices up. 

One of the banks leading the way in quantitative easing has been the Federal Reserve, which has had something of a knock-on effect on the U.S. dollar’s performance against rivals such as the aussie.

After their initial push following the 2008 global financial crisis, the central banks again ramped up policy-support measures and liquidity in the latter part of this year, with the Fed recently pledging billions more a month to support the U.S. economy, giving fresh legs to the Australian dollar. 

The Australian dollar “is still being influenced by global factors,” said Alvin Pontoh, currency strategist at TD Securities, who has an end-2013 target of $1.03 for the aussie. 

Pontoh believes the Fed is likely to extend quantitative easing at least to the end of next year, and the European Central Bank will also likely cut interest rates further.