The Australian dollar, Aussie dollar (AUD) is one the world’s great commodity currencies. Founded in 1966 and floated in 1983 the Aussie “battler” is the 5th most traded currency in the world despite the economy being only the 12th largest by GDP.
The Australian dollar spent much of its first two decades post-float consistently devaluing from the pre-float value of $1.48 US dollars in 1974 to a low of 47 cent in 2001.
Subsequently it broke this huge downtrend with the rise of the Chinese economy and it’s insatiable demand for raw materials – especially those inputs into steel production, iron ore and coking coal – which Australian was endowed with in abundance. It topped this enormous turnaround in 2011 at $1.11 versus the US dollar.
As the super cycle entered decline so too did the Aussie, falling to a low of 68 cents in 2016 and still falling.
However, the Australian dollar had became popular as a small reserve currency holding with foreign central banks. As the value of the currency virtually halved during the bust they kept buying. Because global central banks were fighting both low inflation and oversupply worldwide, many engaged in an overt currency war, deliberately devaluing their currencies to capture or protect global market share of production. This was exacerbated by private sector flows pursuing the “chase for yield”.
This proved a challenge to Australian macroeconomic managers as the commodity bust persisted. Without the lower value, the Australian economy was unable to compete in non-resource sectors. The Reserve Bank of Australia embarked on a series of interest rate cuts, jawboning and, eventually macropudential policy, to bring the Australian dollar to fair value.
There are five drivers to the currency. Australia’s relative position vis-a-vis Chinese and its own growth; interest rate differentials, the strength or otherwise of the US dollar; the terms of trade and sentiment. Each of these tips into any fair value model but over time the primary driver is the terms of trade. The relative strength of each waxes and wanes with wider trends. For instance, during the “tech bubble” of the late nineties the Australian dollar was battered lower by poor sentiment as it was seen as a pre-tech dinosaur. After the “tech bust”, the currency rapidly recovered as sentiment turned favourable for real assets like commodities.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
From the SMH blog: Investors are scampering to unwind wagers on a decline in Australia’s dollar as a pickup in the economy stokes speculation that the central bank will start to raise interest rates next year. Hedge funds and other large speculators cut so-called net shorts by 25,643 contracts to 15,370 contracts in the week ended March 18, the second biggest reduction
A picture is worth a thousand words: On the longer term chart, the head and shoulders bottom and ascending triangle breakouts are confirmed with 94+ as a first port of call: On the crosses, it’s all Glenn Greenspan!
A couple of months is long time in economics, seemingly. The RBA has gone from demanding a lower dollar to not giving hoot in three months, and so, it’s off the the races: And here’s the speech by Captain Glenn, which is remarkable only for its references to Pasconomical obsessions like confidence and the uselessness
Cheap shot, Phil Baker: Mention the Australian dollar on a currency trading desk right now and someone might say: Can’t kill it with an axe. Despite a range of reasons to sell the local dollar it looks like it’s on its way to US92¢. At the beginning of the year, Bloomberg asked almost 50 strategists
Last night the Australian dollar broke out as expected and is flying towards 92 cents: The longer term chart shows the key levels: From locked Business Spectator: The Australian dollar has struck a fresh 2014 high overnight as Bank of America Merrill Lynch analysts issued an upbeat near-term forecast for the currency. …”While we are
The Australian dollar wrecking ball is swinging. The technicals are screaming a looming breakout. We’ve got a head and shoulders bottom in place and an ascending triangle. Last night it spiked again, butting up against the 91.49 resistance level and it’s next step will the December high of 92. After that, technically at least, it’s
Friday evening saw more bullish Australian dollar action. It was a night of subtle ‘risk off’ but not for the Aussie, piling on 0.5% and threatening 91 cents again: The long term chart is now unmistakably bullish with an inverted head and shoulders bottom and ascending triangle forming: The recent commitment of traders report is
The Chinese yuan has spiked again within in its new 2% fixing band, and how: A year’s worth of depreciation now gone. Over the longer term the move is taking on material dimensions: Remember that the 6.20 levels is seen as a tipping point for more selling. From Goldman’s report on the commodity scam unwind
Yes, it’s back, the indomitable Australian dollar, safe harbour (not haven) interest rate harbinger and play thing of global speculators. It’s broken out and is running. From Credit Suisse: AUDUSD has rallied back towards the top of the current range, and a clear move above .9105 should open up a retest of the key resistance
From Deutsche: While there has been a significant decline in iron ore spot prices over the course of this year, AUD/USD has moved higher. In our view while the terms of trade is an important driver of the currency over the long-run, over the short-run interest rates appear more important. Indeed, we find evidence that
The Australian dollar “five drivers” valuation model is worth revisiting today given the price action is looking quite bullish. The five drivers are: 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 For
Since the global financial crisis, a currency cold war has been raging as Western central banks have sought to restore decades of lost competitiveness via dramatic monetary easing. The primary culprit and he who fired the first shot was the US Federal Reserve. First by crushing its interest rate to zero and then via successive
From the excellent Tim Toohey at Goldman Sachs: “Our bearish Australian dollar forecast is underpinned by expectations that US data weakness is transitory, headwinds to Australian growth are intensifying, the next phase in the decline in the terms of trade has commenced, and capital flows are turning less supportive”. “Geopolitical risks and ongoing concerns over the impact of tightening Chinese financial conditions together risk a more
The ribald rally in the Australian dollar yesterday has come to abrupt end as markets woke up to crumbling Chinese data, a Crimean referendum and lousy US data. It’s not entirely clear what triggered what but the outcome was plain as day with stocks taking a 1.5% flogging and long bonds attracting a strong bid
The AUD is on good support and looking vulnerable…
Copper broke through its three year support line last night falling 2.5%: Oil is also looking toppy down, 1.3% on the night: In an absence of substantial data in the US, that was enough to spook markets about Chinese growth prospects. The S&P500 fell half of one percent and bonds were bid with yields down
It’s only a week since I check in on the Australian dollar “five drivers” valuation model but a lot has happened and many are probably wondering why the Australian dollar is not following iron ore into the abyss. The five drivers are: interest rate differentials; global and Australian growth (more recently this has become more
As Capt’ Glenn again failed to put a dent in the Aussie today, from the AFR comes a poetic moment in the life of the Australian dollar:
Last night the Australian dollar launched above the 91 cent resistance mark and is in free air to fly off its inverted head and shoulders bottom: The proximate trigger was a sagging US dollar which was down half percent and break support: This also sent gold back to $1350. On the surface, that had noting to
From Annette Beacher at TD, here are the RBA jawbone trigger points based on analysis of RBA minutes since August: $US0.80-85—is ‘preferable’ and a ‘fair deal’ $US0.85-88—doesn’t draw comment $US0.89-90—the AUD is ‘at a high level’ $US0.91-95—the AUD is ‘uncomfortably high’ “Failure to comment is now a trigger to rally, a situation that is likely to be
From Morgan Stanley: We believe that AUD will be a structurally weak currency over the medium term. Indeed, there are big changes currently occurring in China; not only is the government attempting to rein in lending and prevent excessive hot money inflows, but it is also moving towards establishing a sustainable growth model that is
Regular readers will recall that MB uses a “five drivers” model of Australian dollar valuation. They are: 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 For the first,my view remains that there
A few keener observers than I have noted that the RBA did include some more dovish rhetoric around the dollar in its statement today. The return of the phrase “historically high” is a little shot across the trader’s bows and an implicit acknowledgement that it screwed up royally at the last meeting. The Aussie has
Markets are ruthless. That’s why they’re (sometimes!) efficient. I do not expect a long or difficult period of adjustment to the emerging reality of Ukraine’s situation. Yes, overnight gold jumped a couple of percent to within spitting distance of another technical breakout: But I don’t buy it. In fact, I’d consider fading it. In the
A few step movements this morning as market go a little risk off on Ukraine (or is that China?). The Aussie is under 89 cents: The yen is rallying: But not the US dollar index: Gold and oil are both up solidly: Local share are down nearly one percent as S&P futures are off 16 points
The SMH blog has a chart today showing a recent re-coupling of the Australian dollar and iron ore price: I noted yesterday that there has been a de-coupling of iron ore equities from the price and the renewed flexibility in the currency will be a factor. It is only mitigating, however, not curing, with the
From CoinDesk: The Australian government is keeping a close eye on bitcoin, but not on the regulatory front. Rather, it is tracking every conversion from bitcoin intoAustralian dollars, and vice-versa. The government agency doing the snooping is the Australian Transaction Reports and Analysis Centre (Austrac). The centre is tasked with countering money laundering and terrorist
Another warm congratulations to the RBA this morning from BofAML: AUD/$ is set to resume its bull trend. The almost 2wk old contracting range/Triangle is drawing to a close. The impulsive gain from the 0.8658 Jan 24 low says upside targets are seen to the confluence of resistance between 0.9269/0.9338. Further supportive of the bullish view
Deutsche Bank has produced a study into the Australian dollar with which I completely agree as a base case for the currency and economy: As a house DB expects the RBA to be on hold over 2014, 2015 and H1-2016. In the US we expect the Fed to start increasing the Fed Funds rate around
From Bloomie: A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders. Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group
