The Australian market will face a difficult year on the back of diminishing risk sentiment, according to research from HSBC.
The report, HSBC Global Research: Currency Outlook, said the Australian dollar (AUD) remained resilient in 2012 due to a strong relationship with the "risk on-risk off" (RORO) factor; however, conditions look set to change this year.
"An important factor is that RORO's engulfing influence over the AUD is beginning to decline," the report said.
"While risk appetite will continue to be an important factor for the AUD, this year we might begin to see domestic factors having a greater influence on the currency's performance."
With domestic headwinds affecting the Australian share market, HSBC has suggested a decline in RORO's influence could provide a deteriorating environment for the dollar.
HSBC is predicting the mining boom will peak in mid-2013, levelling out shortly thereafter, providing a difficult domestic environment for the dollar and an assessment of its fundamentals.
Furthermore, global factors such as continuing fiscal concerns in the United States are likely to create a risk-averse environment, affecting the dollar.
"The AUD is one of the most risk-on assets and is very sensitive to changes in risk appetite," the report said.
"RORO's dominance meant that the AUD has benefited from this risk-on environment despite its weak fundamentals."
"Any fall in the AUD driven by risk sentiment may be the perfect catalyst to force the market to reassess the currency's value on a fundamental basis too."
The news follows JBWere's view, covered in yesterday's InvestorDaily, that investors should gain more offshore currency exposure to offset risk during times of low domestic performance.
Foreign currencies give the benefit of diversification and may appreciate relative to the Australian dollar when domestic equities are performing poorly, according to JBWere.
"I think a lot of people now are realising that [local] currency has probably got a lot more potential downside than potential upside. But also people are just appreciating the diversification benefits as well," JBWere's director of global investments, Andrew Hudson, told InvestorDaily.
