As Deus Forex Machina reported this morning, the Australian dollar has broken down and it just now hit to a new low for the move:
This seems an ideal moment to check in on the crosses:
As you can see, the Aussie is dropping slowly against the US dollar and euro but also against the Korean won and Brazilian real. The Yen of course is falling like a stone against everything.
The Aussie weakness seems to be going hand-in-glove with a shift in interest rate markets. Bank bill futures are now pricing almost two full rate cuts, one in May, the next in August, which seems fair enough to me:
Then again, previous rate weakness was not enough to trigger currency weakness. The difference may be that implied future distributions for Australian interest rates are falling just as global growth prospects are rising.
A nice combination for currency weakness.
Can’t see a sustained drop at this point, not with China accelerating.
I can. How do you think we will benefit? Ore has blown its load already. Coal is stuck.
Ironically I think China slowing would now boost the Aussie because it would take the air out of global recovery hopes.
So you’re of the view that the AUD is now a risk-off buy?
Half. Harbour not haven. Real risk off and its through the floor.
I see your logic on the recovery yield convergence (was that third graph a late addition or am I just blind?)
I imagine the only thing that will seriously bring forward expectations of interest rate hikes in the US is sustained jobs growth, which we have not seen yet, regardless of the headlines (employment to population is not improving materially). And interest rates are not going up in the EZ for a long time, nor in the UK, and although I expect the yield curve to steepen in Japan, obviously we stand no chance against the yen. So I’m not sure the yield convergence you’re alluding to will be all that pronounced in the first half.
I think we’d need a sharper weakening in the employment market to open the possibility for additional rate cuts for a significant fall (by which I mean into the mid 90s).
For now it’s undeniably in a down trend, let’s hope I’m wrong and the trend continues.
Time to pump up the tyres on the push bike.
wonder how the election will effect the AUD
Expressed on the TWI, the AUD is still tracking in the high 70′s. Near as I can tell, the TWI high was around 79.2 in Feb 2012. It is at 77.2 today. It has been above 60 nearly all the time since October 2003, the only exception being during the depths of the GFC. It reached 70.0 in April 2008 and again in October 2009. So it has been at these lofty heights for only a few years, sustained by ToT highs and weakness in the industrial economies.
Considering the currency markets are highly forward-looking, the recent softening of the AUD should probably be read as a re-casting of expected relative growth rates.
Perhaps the market is also sensing a shift in demand for USD. For most of the last 11-12 years, buying the USD has been a risk-off move. If buying the USD comes to be seen as risk-on as well as risk-off, then we will see steady USD appreciation. In this case, nothing will protect the AUD from deep falls – possibly back to the 60′s and 50′s experienced not so long ago. And why not? External demand is losing its ability to propel expansion in the AU-economy. Quite clearly, there is not enough energy in domestic demand to sustain a strong growth dynamic, and the result will be further gradual deceleration in output growth.
Considering the deep import-reliance of the AU-economy, any notable drop in the currency will immediately tend to drive reductions in real incomes, and, in turn, lead to tightening in domestic demand – itself already driven by demographic forces – and continued softening in the labour market.
If, as seems likely, the LNP win the election, there will supposedly be a further round of retrenchments in public sector spending. So we can expect the AU-economy to track lower for a long time to come. Maybe perpetual expansion is about to be replaced by prolonged deceleration.
Meanwhile, there is little doubt that demand for the USD will intensify, reflecting stagnation in Yen, Euro, Sterling and the fundamental lack of depth in reserve analogues, such as the AUD.
There is some talk about SE Asia becoming the new source of growth in the global economy. This could well be the case. But it is hard to see how this will automatically translate into radically improved demand in this economy.
Great comment Briefly, particularly about USD risk-on switch. This is something I’ve noticed more and more with correlations and hence why I’ve gone from using DXY (Dollar Idnex) and VIX together to form view about the risk on/off meme to just the VIX (plus a few secondary indicators).
Shorting AUDUSD may be the FOG trade of 2013? (i.e hit it like the fist of an angry god – there’s usually 3-5 of these a year across most markets)
Thanks again.
Cheers, Chris. Things appear to be swinging around (again!). FOG – love it. Mind you, Jupiter was never happier than when whispering confusion into the ears of mortals, who would obligingly hurl their treasure and their courage in the direction of their ambitions.