AUD

Has the Australian dollar called time on European equities’ rally?

Perhaps. The AUD/USD pair has had a long positive correlation with Euro Stoxx futures, going back more than six months. This seems reasonable enough as both fit neatly into the “risk asset” category of markets that are likely to rise when investors feel a bit happier about the economic future.

Moreover, as perhaps the “risk on” asset par excellence, the Aussie is more closely correlated with European stocks than other markets you might think were more natural Euro Stoxx bedfellows, such as EUR/USD or German bund yields.

However, according to Paul Day, chief strategist at Market Securities in London, in the past couple of weeks there have been signs of divergence. Euro Stoxx futures have edged upward even as AUD/USD has made technical analysts nervous with the ominous pattern of “lower highs and lower lows” that usually marks a change in bull-market fortunes.

And there are others who think the Aussie is looking dizzy at its current altitude.

Morgan Stanley points to weakness in the Chinese export order index.

“This provides further evidence that demand in developed markets remains weak, which should not bode well for the high-beta commodity currencies,” the bank’s foreign exchange strategists wrote.

However, they don’t expect an AUD collapse, or anything like one; rather a correction of recent gains. The bank is looking for a return to the $1.05 to $1.0450 area in the near term. The pair was at $1.0633 at 0645 ET Wednesday.

If they are right, correlations suggest that the road for European stocks may get rougher, but it should at least remain passable.