What’s holding up the Australian dollar?

A couple of takes. First ANZ:

  • The run-up to 0.8000 looks stretched. Continued uncertainty about the USD may hold the AUD up, however
  • We see rates on hold at 1.5%. Recent data suggests the risks to the upside are rising.
  • We have used statistical techniques to analyse the language in the RBA’s post-board meeting statements. From this we have constructed a measure of the RBA’s bias – our RBA Bias Index. This index provides a clear signal about the likely change in the cash rate over the coming 6-12 months (Figure 3). It also leads changes in market pricing of the RBA cash rate. The most recent post-meeting statements have taken the RBA Bias Index a little above one. This indicates the RBA’s policy bias is starting to lean in a slightly hawkish direction. We don’t think the signal is yet strong enough to shift our view from ‘on hold’, but the evolution of the RBA’s language clearly bears watching.

Meh. The RBA’s dwelling construction and business investment outlook is way too strong. If it hikes it’ll be a policy error. Still quite unlikely.

Also, Morgan Stanley:

Commodity price strength has come on the back of better global demand and China reducing excess capacity. We have often cited the CRB RIND index which has been increasing again as of late (Exhibit 6). We prefer the RIND as it excludes speculative forces and marks the underlying trend. Commodity reflation supports commodity producers via the terms of trade channel. We view this as a likely explanation as to why AUD has been supported despite declining speculative sentiment (Exhibit 7).

I’d like to know what the DSI measures. Terrific correlation there. It’s not forex traders, which are long AUD on COMEX.

In short, commodity prices are keeping the currency range high at the moment while US political risk is pushing it around day-to-day via the USD. The RBA is still on sidelines.

My view remains that there is good risk of one more spike higher as the Fed under-delivers on tightening expectations.

But still substantially lower next year as China slows.

David Llewellyn-smith is Chief Strategist at the Macrobusiness Fund, which is currently substantially allocated into international assets. If you want to get your money offshore to catch any downdraft in the Australian dollar then fill in your details below and we’ll be in touch. 


The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. 

Comments

  1. http://store.traders.com/-v13-c06-backtst-pdf.html
    “The daily sentiment index (DSI) is based on nonprofessional speculators’ opinions of futures markets. Its creator, market timer Jake Bernstein of MBH Commodity Advisors, surveys nonprofessional traders at the end of each trading day regarding their level of bullish sentiment for each futures market and publishes the results after the markets close via a hotline, fax service and computer bulletin board. This index ranges from one to 100, in which a reading of 80 to 100 indicates that most of the respondents are extremely bullish, while a reading from one to 20 signifies that most respondents are extremely bearish. A reading of 50 would mean that the respondents are relatively neutral about the general market direction.

    Traders normally use the DSI as a contrarian tool. The logic behind doing so is that when everyone agrees on market direction, the market usually moves in the opposite direction because the current price has adequately discounted the prevailing sentiment. Thus, a reading of 25 or below is considered to be a bullish reading, while a reading of 75 or above is taken to be a bearish indication.”

    The contrarian point seems confusing when noting it against exhibit 7

  2. So where is the index at?

    I like dailyfxcm and actually trade on their platform here is there sentiment index of which like all others should be taken with a grain of salt.

    https://www.dailyfx.com/sentiment

    The rationale is not entirely “because the current price has adequately been discounted by prevailing sentiment”

    It’s traders taking profit, closing the bullish currencies to buy the bearish one to complete the trade, the rush for the bearish currency.

    Again pinch of salt.

    • Personally, The AUD is heavily traded for the size of our economy whilst offering virtually no yield.

      One catalyst and it will hit 65~

  3. Aussie1929MEMBER

    Consider the sentiment towards the USD and the possibility of their debt ceiling being raised again. The USD has been dropping which is one reason the AUD is perceived as up. I think the AUD could reach parity again because people will flock into bonds and the 10y looks to be in consolidation. Or people will flock to crypto currencies as the talk about them has increased alot in investment forum sites. Just my 2 cents.

  4. It’s possible, The AUD value is really a popularity contest but I’d argue the minuscule rollover rate is as about as popular as a fart in a elevator vs USD.

    I’m not giving a plug for FXCM but they are very decent with rollover and a 10,000 lot is offering 13cents USD a day.

    Holding $100,000 AUD for $9 usd interest a week 😕 Last time we went to parity and beyond it was almost $100 AUD for a equal lot and the momentum on the up.

    Given Australias extraordinary debt levels and economic prospects IR will tank as the western world comes out of recession.

    Long term AUD is going to 40 cents and my view as a decent trader is of the view AUD will have 0.5cent decline per month over the next 4-5 years.

    My praise goes to MB for their views of gas exports of which is the only “wild card” that I see affecting this view of mine.