From Tim Toohey at Goldman: Looking through some negative news flow… Following on from the material contraction in GDP reported for the September quarter, Monday’s mid-year economic and fiscal outlook incorporated news of a further deterioration in Australia’s public finances. Against this negative backdrop, it is not surprising that surveyed sentiment has been under some
Australian Dollar Analysis, News and Forecasts
The Australian dollar, Aussie dollar (AUD) is one the world’s great commodity currencies. Founded in 1966 and floated in 1983 the Aussie “battler” is the 5th most traded currency in the world despite the economy being only the 12th largest by GDP.
The Australian dollar spent much of its first two decades post-float consistently devaluing from the pre-float value of $1.48 US dollars in 1974 to a low of 47 cent in 2001.
Subsequently it broke this huge downtrend with the rise of the Chinese economy and it’s insatiable demand for raw materials – especially those inputs into steel production, iron ore and coking coal – which Australian was endowed with in abundance. It topped this enormous turnaround in 2011 at $1.11 versus the US dollar.
As the super cycle entered decline so too did the Aussie, falling to a low of 68 cents in 2016 and still falling.
However, the Australian dollar had became popular as a small reserve currency holding with foreign central banks. As the value of the currency virtually halved during the bust they kept buying. Because global central banks were fighting both low inflation and oversupply worldwide, many engaged in an overt currency war, deliberately devaluing their currencies to capture or protect global market share of production. This was exacerbated by private sector flows pursuing the “chase for yield”.
This proved a challenge to Australian macroeconomic managers as the commodity bust persisted. Without the lower value, the Australian economy was unable to compete in non-resource sectors. The Reserve Bank of Australia embarked on a series of interest rate cuts, jawboning and, eventually macropudential policy, to bring the Australian dollar to fair value.
There are five drivers to the currency. Australia’s relative position vis-a-vis Chinese and its own growth; interest rate differentials, the strength or otherwise of the US dollar; the terms of trade and sentiment. Each of these tips into any fair value model but over time the primary driver is the terms of trade. The relative strength of each waxes and wanes with wider trends. For instance, during the “tech bubble” of the late nineties the Australian dollar was battered lower by poor sentiment as it was seen as a pre-tech dinosaur. After the “tech bust”, the currency rapidly recovered as sentiment turned favourable for real assets like commodities.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
Via Deutsche: One of the least talked about but possibly most important tax shifts in the history of the United States is House Speaker Paul Ryan’s and President-elect Trump’s “border tax adjustment” proposal. This is part of the “Better Way” reform package and also figures prominently in the writings of senior Trump administration officials. Put
The Fed has unleashed global bond carnage this morning as yields move to reprice rate hikes. US yields have rocketed: And the longer terms chart: Clearly the short end is pricing to the Fed’s three hikes for next year. But the long end is trailing so the slope is stable and is not exactly forecasting
From Goldman: Tomorrow, in line with market pricing, we expect the FOMC to raise the federal funds rate by 25bp. From there, our US economists price a more sizeable tightening cycle than the market (see Exhibit 1), and we expect further USD strength as the market re-prices more tightening from the Fed. That said, we also think
Melbourne Institute monthly inflation is out and is still weak at 0.1% month on month and 1.5% year on year: Trimmed mean is weaker, up 0.2% MoM and 1.1% YoY. Meanwhile, ANZ job ads are out too, up 1.7% month on month: 31/12/2015 -0.3 0.3 10.5 31/01/2016 0.9 0.5 10.3 29/02/2016 -1.2 -0.2 10.2 30/03/2016
From Morgan Stanley: For a trade into year-end we suggest selling AUDNZD driven by terms of trade differentials. In general, when analyzing commodity currencies it’s hard to stay away from monitoring data from China. Yesterday we learned that the Chinese authorities were going to restrict mortgage lending further by raising deposit requirements. With the aim
Soc Gen’s Kit Jukes sees a higher USD: A strongish durable goods orders release, and a perception that easier fiscal policy is coming all over the world are cited as the catalysts for yesterday’s lurch higher in Treasury yields, but the underlying cause is that after 10year yields halved between the end of 2013 and
The Aussie is fighting manfully against the USD rocket as commodities hold up on the Chinese futures bubble and it is downright powerful on the developed economy crosses: But Deutsche has some very good advice: A fortnight after the US election, we expect continuing weakness in the dollar bloc. While we would sell the entire bloc
From the AFR: “For FX markets, politics is the new economics,” said David Bloom, global head of FX research at HSBC. “Quantitative easing has stifled the bond market, distorted equity markets and narrowed yield differentials. This means FX is uniquely placed to reflect political developments.” With major central banks continuing to buy up bonds, regardless of the
The Aussie “bondcano” has stalled: Not so the US with short end yields right at the verge of a breakout to new highs on daily charts. The monthly is already well clear: Oddly, the US yield curve remains very unconvincing: Less so even than the Australian: Even so, the US/Australia bond short end spread has
Some folks are probably a little bemused by recent action in the Australian dollar. After all, it has dropped hard in recent weeks just as Australia bulk commodities and terms of trade have gone through the roof, which is quite unusual. The reason for this is that the US dollar has been on a ripping
Fascinating from Macquarie: We have updated our economic, currency and interest rate outlook for Australia following the US election as part of our November Global Macro Outlook. Outlook GDP outlook: We have downgraded our Australia GDP outlook in concert with our US economists; downgrade to the US growth trajectory. The key impact channel
From Goldman: • President-elect Trump’s proposals, if enacted, would have significant implications for the US economic outlook over the next few years, some positive and some negative. The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply
The Hillary rally was back overnight as the USD firmed and other majors fell with the yuan weak: Commodity currencies split again with down and dirt up. The Aussie is untouchable though the rand is even hotter: Gold was shellacked again: Oil held on: Base metals are now chasing the ferrous bubble: And miners are
Time for another Australian dollar five drivers update. MB’s five driver model for the Aussie is: global and Australian growth (or, more recently, Chinese growth and Australia’s terms of trade); interest rate differentials; investor sentiment and technicals; and the US dollar. On the first, Australian growth is stellar versus the world at the headline level. There
From Bank of Tokyo Mitsubishi: The Australian dollar has been the best performing currency in the Asian trading session following last night RBA policy meeting. The RBA left their policy rate unchanged as expected and more importantly left the final paragraph of their accompanying statement unchanged as well maintaining a neutral bias. The statement acknowledged that China’s economy
From BNPParibas: The dollar has performed well in October, moving rapidly towards our bullish USD year-end targets of EURUSD 1.08, USDJPY 108 and USDCAD 1.35. We remain constructive on the dollar heading into an expected December rate hike. However, we believe the USD has gained ground too quickly and is now vulnerable to a retreat.
The Australian dollar is threatening to break out of 2016 trading range. But it’s not threatening to fall, it’s threatening to rise. The daily, weekly and monthly charts all paint the same bullish ascending triangle pattern: The two drivers are not hard to find. The first is the now pretty impressive bounce in the terms
From the AFR: The Australian dollar is likely to hit US85¢ within five years and could trade as high as US90¢ because interest rates in the United States aren’t going to rise as much as expected, according to one of the world’s bigger private equity funds. The director of research for the Carlyle Group, economist Jason Thomas, who was