Australian Dollar Weekly Wrap

See the latest Australian dollar analysis here:

Australian dollar free falls as Fed hikes return

I’ve been absent from the currency space in a tumultuous week, as I was out of the office on Business,  where the Aussie tried to break the bottom of the range only to flip the shorts and rally aggressively back to 1.0783 as I write.

What can we garner from the run up to and post Greeek vote price action? The simple answer is that Aussie is a strong currency these days.

It’s not necessarily the answer exporters or tourism operators want to hear but it is the reality. If ever there was a set of preconditions where the Aussie could have made a quick run down below 1.00 it has been the last few week’s but, as you can see in the chart below it has stubbornly found support around the 1.04 region and consistently and persistantly bounced.

The technical outlook is clear from the above chart. The Aussie remains in a firm and clear 1 year uptrend and has broken back up through the downtrend that has been containing it since the high back in early May we called. Add in the fact that the Aussie has not been able to get down to, let alone through the 50% retracement of the .9706 – 1.1013 move and we have a pretty strong picture of where we are at.

Now it sounds like I’m getting all bulled up at the top of the recent range and I confess to being uncomfortable with this feeling but the reality is that the charts look a little this way.  Here is a closer look at the last 2 months price action.

In reality though I think, as the chart above suggests, that the Aussie is in a 1.04-1.10 range for the moment and having tested the bottom side we are simply sliding toward the topside of this range again. Indeed I would really “like” to see it push to 1.10 again so I can judge the veracity of the call that 1.1013 was a medium term high.

If the Aussie does manage to push through 1.1013 we’d be looking for 1.1250 and then ultimately 1.15. These are just levels not forecasts and we’ll just have to see what happens over the next week or so but for now its just in a big old range.

here is a question – Is there any evidence of this so-called re-rating?

It’s certainly true that have talked a lot about re-rating of the Aussie and there has been some discussion of the veracity of this claim but I think the price action of the last two months  has to a very large extent suggested the re-rating claim is true – as I noted above the Aussie could have, should have, would have easily fallen back below 1.00 had it been its old self.

But lets look at some correlations – straight from my Bloomberg terminal.

Over the past year the Aussie has been highly correlated with assets that you would probably put in the “risk” basket. Equally you could probably just say these are assets that have ebbed and flowed with the USD and this would be my preference. But never the less these are specualtive or punting assets in a QE2 world such as the Euro, Dow Jones and S&P500, West Texas Crude, Copper (LP Future on the table) and so on.

But since the selloff in markets began in April/May (I’ve used the beginning of May in the table) the Aussie has been in a statistical sense and certainly in its inherent strength, been doing its own thing as the table below shows.

Now we all know that these types of relationships, or correlations, are generally not static and do move around. But the last couple of month’s trade suggests to me that our hypothesis is looking like it might be right and the Aussie has been re-rated. It held up in the face of a potential global meltdown in a way that other assets did not but still roared back with those other assets.

It seems like we are just going to have to get used to a stronger Aussie unless or until Mining and China falter.

I’ll update the 5 drivers in a post early next week.

Have a great weekend.

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This blog is for information only and does not constitute advice.

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  1. IMO, the AUD is currently at exceptionally high levels because most other western currencies are borrowable at exceptionally low rates.

    However, I also agree that with China now being the second largest economy in the world, and Australia benefiting from that, the average AUD exchange rate in the next decennium is going to be higher compared to the last decennium.