The firmness of the Australian dollar is once again generating irrational analysis:
Australia’s dollar is emerging more like a “safe haven” asset, with the currency continuing to strengthen in the wake of heightened volatility across global financial markets.
Fears of another war amid growing instability in Iraq have battered market sentiment and spurred buying of assets traditionally considered “safe”, such as gold and US Treasury debt.
…“There’s certainly something going on,” HSBC chief economist Paul Bloxham said.
“There’s a different kind of behaviour around the Aussie dollar than there has been in the past. It is being treated more like a safe haven asset.”
Sure it’s perplexing if you start with a false assumption. Global volatility is not rising. It has fallen to the lowest levels anyone can remember. It’s pedal-to-the-metal “risk on” right now and Iraq hasn’t put a dent in it.
The Aussie has traded as a kind of “safe harbour” over recent years amid global currency wars and has probably been more resilient than in the past. But that’s very different to a “safe haven” which catches a powerful bid when investors head for the exits in risk markets. Let’s not forget that it’s down 10% in the past year or so even as global volatility has crashed.
NAB has a better idea of what’s afoot as its co-head of FX strategy Ray Attrill said the Aussie was:
“living on borrowed time’ above US94¢ and if there was a big jolt to risk aversion, the currency would weaken.”
That or a local rate cut.
