Last night the Australian dollar fell to it’s lowest point in two weeks:
The falls were’t large but they were broad, impressively so on the crosses:
That’s a hint that the iron ore and China weakness we’re seeing is finally undermining the currency.
Aside from the structural reasons that we’ve often discussed for why the dollar is so over-valued, even on shorter term considerations it looks mis-priced. Given Australia’s deteriorating fundamentals, this can only be due to the carry trade but it’s rationale is under siege as well. US bonds rates may have surprised to the downside lately but not as quickly as Aussie bond yields. The 10 year spread is now more compressed than at any time since September last year, when the dollar was at 89 cents:
Bonds are pricing a rate cut. Much of the reasoning of my recent “five drivers” post still looks reasonable. I would only add that we may be forming a bearish double-top on the 2014 rebound:
The Australian dollar looks vulnerable.
