The Australian Dollar went through a considerable bout of weakness recently. Most of the fundamental data, or at least its interpretation by market participants, suggests additional rate cuts by the Reserve Bank of Australia later in the year. Some even speculate that multiple rate cuts (0.50-0.75%) are already “priced in”, although this statement amounts to guesswork. So much can happen between now and future central bank actions that what is “priced in” today will be long forgotten and meaningless. Still, from the short-term perspective, the Aussie stabilized last week, finding support at the 1.0300 handle, with nice rebound to 1.0380 by closing on Friday.

Early Monday brings events, which could determine the intermediate-term fate of the Australian Dollar. First, the inflation data in form of the Producer Price Index for Q1 is set for release. The forecast calls for annual decline to 2.2% from 2.9%. Falling inflation makes it easier for central bank to cut interest rates, thus be detrimental to the AUD as carry trade instrument. However, the real market mover is the Manufacturing PMI from China, coming one hour later. Even though this is a flash, or preliminary reading, markets will pay attention. In recent months, this indicator created a lot of volatility in the AUD, with spreads often jumping to 20-30 pips at the release and immediate moves in range of 60-80 pips. Even though this is a flash, or preliminary, reading markets will pay attention. If the PMI rises above latest result of 48.3, preferably above 50.0, the Australian Dollar should rally. At the same time, if the PMI disappoints, the AUD could go into a sharp selloff.

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In a rather unexpected fashion, I had to take a break from this blog as well as trading in general, at least actively. Personal issues piled up and I was unable to postpone them any longer. I could have traded on Friday, as I was ready, but the conditions were not suitable. Even though currencies were trading, other financial markets were closed for Good Friday. In the USA, the financial futures were in business for 45 minutes following the NFP report and the bond market for a little longer. All this meant thin liquidity and possibly exaggerated yet unsustainable moves in response to employment numbers. While on this subject, the drop in unemployment rate to 8.2% from 8.3% was explained not by creating new jobs but because “people left the workforce and are no longer counted as unemployed”. Hmm, creative accounting at its… worst?

On similar note, financial markets in most countries are closed on Monday, but we still have data scheduled from release, including couple of important pieces. The Trade Balance from Japan certainly has the potential to move currencies, especially the Yen. In addition, the Consumer Price Index from China could create a spike in volatility, particularly among the commodity currencies. As always, the Australian Dollar should be most active. I am perfectly content to wait this out and start on Tuesday, with the exception of the JPY, where I might place some sell orders.

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With Greek situation normalized (for now), markets are shifting attention to Spain. For a while, it looked like this country was trying to target a 5.8% deficit in 2012, rather than the 4.4% it had promised the EU. Under pressure from Union officials, Madrid eventually agreed to 5.3% for the year. Still, this is way above the EU-mandated deficit target of 3%, a level Spain is expected to reach next year. It will be extremely difficult to achieve, considering the deficit for 2011 was 8.5%, which means that Spain must make the deepest cuts of any Eurozone country outside Greece. With the highest EU unemployment of about 23%, the economy can easily fall into its second recession in three years.

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