Australian dollar to stay high no matter the Fed?

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From Westpac via the AFR:

Investor demand for yield will keep the Australian dollar at or above current levels even after the US Federal Reserve starts tightening monetary policy, according to a contrarian view from Westpac.

Bank economist Robert Rennie says according to a fair value model based on export commodity prices, the spread between Australian and US two-year bond yields and the Chicago Board Options Exchange’s Volatility Index, or VIX, the local unit has not diverged widely from fundamentals over recent years.

He questions whether demand for Australian dollar-denominated assets will alter much once an increase in US interest rates makes the greenback more attractive.

“My sense remains that the Australian dollar will also continue to attract yield-related demand that will support it even as the US dollar inevitably starts to push higher,” he said.

Possible. As I pointed out last week, the Aussie is now outperforming all of our major competitor currencies against the $US and Chinese yuan. Both against developed economies:

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And commodity exporters:

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The spread between Australian and US long bonds has been crushed but at the short end Glenn Stevens’ housing bubble has Australian rates still very high, more than 200bps above US yields.

The Aussie has historical form here too. It tends to cling on and then capitulate all in one go to find a new much lower price level rather suddenly.

Still, I can’t help feeling that the Aussie will bleed somewhat lower as China keeps slowing and the terms of trade keep falling causing the RBA to cut the cash rate again, and then collapse completely when risk evaporates on the next global crisis.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.