Clouds Gather On Aussie's Horizon. By Nicholas Hastings

The outlook for the Australian economy may be looking brighter but the outlook for the Aussie is starting to cloud over.

A likely fall in global risk appetite, the possibility of inflation concerns and a high level of long speculative positions are all making the Australian currency look more vulnerable.

Also, up at its current high level against the U.S. currency, the Aussie could already be facing clandestine intervention.

The Reserve Bank of Australia gave the latest vote of confidence in the economy - noting in the minutes of its July meeting that monetary and fiscal easing had ensured that demand "had been more resilient than expected."

The central bank also indicated that the level of interest rates - currently 3% - is probably appropriate and doesn't need to be reduced anymore.

Other good news on the economy came from China, where net coal imports in June nearly doubled from those in May and China Steel is now expected to resume steel production in the next week or so rather than waiting until September as originally planned.

This will help to allay fears that Chinese demand for Australia's two major bulk commodity exports - coal and iron ore - are on the slide.

With car sales also rising by 5.7% last month, after a 5.4% increase in May, Australia once again looks like it has escaped the worst of the global recession.

For the Aussie, however, this may not be quite the good news it once was.

While Australia might be rebounding more strongly than anticipated, there remains serious doubt over the health of other major global economies. Good risk appetite, which has ensured support for the Aussie in recent months, looks set to decline again - ensuring that high-yielding currencies fall out of favor.

The seeds of future Aussie weakness also could have be sown during the past months of Aussie strength as speculative long positions have grown to levels that make the currency look that much more vulnerable to profit-taking. Recent data from the Chicago Mercantile Exchange show that although there has been some reduction in these positions they still remain well above levels seen over the last year.

Another concern for the Aussie, remains the risk of inflation. If this fails to continue falling, the RBA may well find itself under pressure to start hiking rates again - a move that would quickly put an end to the current economic optimism.

However, the RBA may already be curbing the Aussie's advance on its own.

After a sharp rally up from nearly $0.63 in March to just over $0.82 in May, the Aussie has essentially remained range bound.

Steve Barrow, senior currency strategist at Standard Bank in London, pointed out that a sharp rise in Australian reserves by a U.S. dollar equivalent of AUD1.4 billion in May and AUD1.9 billion in June could well have been busy providing a cap for the currency's advance.

"The data on their reserves suggest that some surreptitious intervention might have occurred," Barrow said.

If so, then the Aussie may have already seen its highs for now and it will be only a matter of time before the currency starts backing down again.

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Early Wednesday in Europe, the Aussie declined a little like most other high yielders, amid renewed concern that CIT will still be declared bankrupt and ongoing worries about the global recovery. This led to a fresh decline in risk appetite, even though equities remained in positive territory with the Nikkei gaining 0.7%.

By 0645 GMT, the Aussie was down at $0.8148 from $0.8164 late Tuesday in New York, according to EBS.

Research by JPMorgan suggesting that Barclays and The Royal Bank of Scotland will need another GBP21 billion to meet new capital rules under a reformed regulatory regime was cited as another reason for the gloom.

The dollar slipped a little to Y93.63 from Y93.66, while the euro advanced a little to $1.4192 from $1.4197 but was flat at Y133.01 from Y133.02.