The Aussie is threatening it’s September highs today and is almost certain to bust through in the event of a Washington settlement. It’s worth revisiting the five drivers model of valuation again, briefly:
- interest rate differentials;
- global and Australian growth (more recently this has become more nuanced for the Aussie to be more about Chinese growth);
- investor sentiment;
- the US dollar; and
- technicals
First, interest rate differentials are looking more attractive with local markets pricing out rate cuts again:
The Credit Suisse index is almost pricing a full rate hike within 12 months now (thanks Sydney!)
As well, the US taper is receding with each passing day and, as reported yesterday, the bond spread between the US and Australia is at its widest in four months.
Second, global growth is also considered to be improving (notwithstanding IMF warnings) though it’s going to take more heat if the shutdown persists. Chinese growth is still reasonable too and although I expect it to wane in the first half of next year, the stimulus is holding sway for now. Iron ore remains remarkably resilient and recent comments from Chinese officials are all bullish, including today, from the SMH:
…deputy central bank governor Yi Gang is being quoted by Xinhua as saying, the latest expression of confidence from Beijing that the world’s No. 2 economy is steadying.
“I think for this year we’re going to have certainly above 7.5 per cent growth rate,” Yi was reported by Xinhua to have said in Washington. “Maybe 7.6 per cent (or) something like that.”
And, of course, there is a new wave of optimism about Australian growth with cyclical data supporting it, as misplaced as that is in the medium term.
Third, sentiment appears to be rising somewhat in the Commitment of Traders report with large and small speculators:
There’s plenty more room to rise there as well.
Fourth, the US dollar is weak as the shutdown persists and although it has bounced at hints of resolution, not strongly so, and the delayed taper may also keep a lid on it for now.
Finally, technicals still show a bullish double bottom or inverted head and shoulders pattern plus a nearing breakout:
If it gets through the September high it will be into free air again.
Sadly, the Australian dollar looks primed.
