With US bond yields pushing higher again and the 10-year yield moving past the psychologically significant 3% level, this has lent support to the USD…during periods when the correlation between the two is high and rising, it tends to last for an average of around two months.
Hence, should US bond yields continue to move higher, history suggests that the USD could be supported for some time.
Leveraged funds’ USD short positioning is near a record high, and short USD positioning by asset managers is also at all-time highs.
With the DXY breaking above key near-term technical resistance levels and, importantly, breaking above the downtrend channel in place since early 2017, the unwinding of short dollar positioning could propel a larger rebound in the DXY.
The unwinding of short dollar positioning can sustain USD strength for a time and could be pronounced given that we are also entering a month where the dollar has historically tended to do well.
In this regard, AUD looks susceptible to further downside pressure.
The lack of carry means the AUD remains at the mercy of shifts in risk appetite and, more recently, of USD rate dynamics.
Both suggest AUD weakness ahead.
ANZ also now sees the Aussie at 72 cents by year.
We retain our view that the Aussie will be lower still at 70 cents as China slows and a renewed terms of trade shock rolls across the economy exacerbating the income squeeze.
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.
