Regular reader will recall that MB uses a “five drivers” model of Australian dollar valuation. One month ago I described how they were turning bullish for the currency.
Revisiting those drivers today and it’s a weakening picture:
- interest rate differentials;
- global and Australian growth (more recently this has become more nuanced for the Aussie to be more about Chinese growth);
- investor sentiment and technicals; and
- the US dollar
First, interest rate differentials are still favourable to the Aussie but the widening of spread is slowing. Local interest rate markets have not moved upwards in the past month:
And following today’s poor NAB survey my view is that markets may begin to tighten towards no rises at all. The spread between US and Australian ten year bonds has widened in the past month but is slowing:
With taper firmly back on the radar for early next year as better than expect US data flows, the US ten year is more likely to break higher than our own in my view.
On driver two – global, local and Chinese growth – I would describe where we’re at as the “peak is in”. Although global growth may accelerate next year, Chinese growth is going to slow over the next six months. The evidence for this is declining lending:
And the emptying fiscal stimulus pipeline:
The other point to add is that the only real source of any upside to global growth is the US and that would be bearish for the Aussie anyway.
Drivers three and four are also weakening for Aussie bulls. Technicals show a distinct head and shoulders top pattern and any break of 93 cents will open clear air to the downside:
As well, the Commitment of Traders report is showing large and small speculators, which drive the currency’s value, are looking a bit peaky after their month long reversal. I would not underestimate the impact of the RBA on sentiment, either. More and more voices are calling for unorthodox policy intervention and the jawbone is clearly deployed.
Finally, the US dollar is looking quite strong, with another head and shoulders pattern, this time inverted, in place:
Moreover, gold, the undollar, is looking weak as well:
The dynamics apparent here are not altogether favourable to stocks, either.
