A big week for the Australian dollar ended with it for the first time in the modern era above 1.05. The actual New York close of 1.0564 is more than 2.5 cents above the low for the week registered on Tuesday.
Up until the employment figures on Thursday, the Aussie’s strength reflected a weak USD, so it moved with EUR and other currencies but skipped away into week’s end to be one of the strongest performers on the week.
There is little reason for traders and investors to sell the AUD at the moment. Indeed for exporters and import competing industries this is the worst possible environment and the most positive for the AUD.
Benign global growth at a time of USD weakness means upward pressure from all 5 drivers in our valuation model.
1) Global growth and commodities are positive even if the former is slightly downgraded from 6 months ago. Commodity prices are underpinned both by growth and a weaker greenback which makes AUD strength a leveraged bet to the USD.
2) Interest rates are moving higher around the globe with the Chinese hiking another 25 bps this week. The ECB did likewise, although Trichet’s comment that this wasn’t necessarily the start of a “series” tempered some expectations, even if we know he didn’t mean it. In the US, the pending closure of the Government has complicated Fed signals toward ending QE and helped pressure the AUD.
Against this backdrop the stronger than expected employment report that showed around 38k new jobs last month and, crucially, unemployment under 5% has put RBA tightenings back on the table in the minds of traders so negating any AUD negatives from a closing in the interest differential gap.
3) Investor sentiment toward the AUD remains positive and in general markets from equities to commodities and beyond appear to have a bullish hue further underpinning the AUD.
4) Technicals are also supportive even though the Aussie is at/through the top of its long run uptrend channel. Short term overbought risks remain high and a pullback is certainly possible but good solid underlying demand will see significant dips bought.
5) Larry Kudlow’s “King Dollar” is under attack. As the other side of the AUD/USD, its weakness necessarily feeds AUD strength. All other things being equal, it also drives commodities higher because most of them are denominated in USD and act like “physical” currencies. Unless or until the USD turns or stops falling, this on its own can drive AUD higher.
So, all in all, the Aussie has had a great week underpinned by global and local support. These lofty levels may be reversed at some point in the next week but not sustainably as this benign environment builds and feeds on the Australian dollar’s strengths. We’d need to see a “risk off” event or something that seriously threatened domestic and/or global growth to knock the Aussie back sustainably. On that note, watch out for oil because its march will become a handbrake on the global recovery. Not yet though.