AUD safe harbor gets choppy

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choppy water

by Chris Becker

Semantically, there’s not much difference between the term “safe harbor” and “safe haven”, but its a bit more nuanced than say the Pascometer bleating about “doom-mongering” vs prudent risk analysis.

But it’s pretty obvious that global capital is re-rating the Australian dollar right now as just a temporary harbor – one that it is ready to pull its money out as the waves start to get choppy and that breakwater out the front is looking shorter by the minute.

The main reflection we see of this is the poor performance (sic) of the Aussie, but the focus should be on the government bond market. This week, as the AUD plunged and the notion of higher US interest rates put a bid under US Treasury Notes, Aussie 10 year bonds lost nearly 8% in US dollar terms. This was one of the worst performers in the bond complex, even as the USD continues to gain strength.

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So what – why is this a problem? Nearly 70% of all Australian government bonds are owned by foreigners, all of whom are in the Federal government’s sight as Treasurer Joe Hockey announced a near $50 billion deficit recently.

Although there is no problem meeting this supply as long as the government holds its AAA rating, the unwind signals are most definitely there in the price action:

australia-government-bond-yield
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And although the spread between Treasuries and Aussie 10 years is currently at 106 points – still a sizeable rate differential – it is narrowing due to the prospect of higher rates in the US, stable or lower rates in Australia coupled with the ever present falls in iron ore and a burgeoning deficit.

The Australian dollar technically is sitting on a five year old neckline of support although I would contend its got til 84 or so before the carpet is pulled out:

audumonth

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 The shorter term picture using weekly charts shows the unwinding going on this last month and why the 86-87 level remains important for technical and macro funds out there.

aaudweekly

The waters are getting murkier but there is daylight below 80 cents.