Aussie Won't Shine Like A Star Just Now. By Nicholas Hastings

Aussie bulls will need plenty of patience.

The Australian dollar still remains one of the brightest stars in the currency firmament and the Australian economy is still likely to head out of recession well before most others.

However, the currency's immediate prospects have fallen sharply - in line with the decline in commodity prices and a fall in risk appetite.

So, instead of extending gains well above $0.80 against the U.S. dollar as many had expected, the Aussie looks more likely to head back down to $0.75 or so before then.

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For some time now, the Australian currency has been cashing in on investor hopes that the global recession is over and that demand for commodities will return.

Optimism on the commodities front was boosted by reports that China was building stocks to feed its ever-expanding economy.

Now, however, there are signs that stock building is ending and evidence that the global economy isn't pulling out of recession as quickly as originally thought.

In fact, even politicians and central bankers have been keen to curb market expectations with leaders of the Group of Eight leading nations meeting in Italy this week warning of the significant risks that remain to the downside.

In Australia, the level of unemployment continued to rise this week taking it to levels last seen six years ago.

Also, given that the Australian currency has rallied from down at $0.63 since the start of March, the Reserve Bank of Australia could well contemplate cutting interest rates again now that it is up over $0.78.

But it is that downgrade in the global outlook that could well knock the Aussie the hardest as risk aversion rises and investors once again steer clear of higher-yielding more risky asset markets.

Of equal concern for Aussie bulls is the poor outlook for commodity prices. The CRB index has already fallen by more than 13% since the start of July and further declines are likely if the outlook for Chinese demand continues to deteriorate.

The political turmoil in China earlier this week, the worst since the Cultural Revolution, has reminded the market of the risks to Chinese growth. Also, talk that Chinese commodity re-stocking has come to an end has been encouraged by reports that a Chinese company has canceled the contract of an Australian coal shipment.

All this has only given investors even more of an excuse to sell the Australian currency, especially given that long positions had probably been overdone in the last three to four months.

Tellingly, analysts are now saying that the Aussie will not only suffer against the dollar but also get hit against the euro, another high-yielding currency that normally suffers at a time of high risk aversion.

Continued risk aversion helped to push the Aussie a little lower early Friday in Europe, with the currency falling to $0.7810 by 0645 GMT from $0.7830 late Thursday in New York, according to EBS.

As the market waits nervously for next week's second-quarter earnings, the dollar was pushed down to Y92.65 from Y92.93 while the euro fell to $1.3966 from $1.4030 and to Y129.42 from Y130.40.

The yen's gains came despite more warnings from Japan that a strong yen isn't good for exports. The euro wasn't helped by reports in the German press that at least 10 East European countries are negotiating with the International Monetary Fund for billion dollar aid programs.