This call is a bit early but MB’s five drivers model for the Australian dollar is pointing lower. 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 the
Australian Dollar Analysis, News and Forecasts
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.
The People’s Bank of China (PBOC) has set the yuan reference rate at 6.1580 versus 6.1556 yesterday. No liquidity drainage today but SHIBOR is still climbing: The chart remains very sharply up for US/CNY and is closing swiftly on the erasure of two years of appreciation: If there are any CNY longs left, they’re getting
The Dalian Commodity Exchange is open and iron ore futures have resumed their slide, down another 1% at the open with a small rebound. Rebar futures have held up. Major iron ore miners are following Dalian down, off 1-2% and dragging the ASX into the red. More importantly, the dollar seems to also being dragged
BofAML noted today that forex volatility has fallen again to record lows: The persistent drop in rates and FX vols has been the most prominent market trend since the Fed tapering scare last summer. In most cases, realized volatility is even lower than implied. Last time vols were so low, East Asia, Russia or the
From Credit Suisse: Extension below .9253/51 should keep the bias lower to test early April low at .9205 next. AUDUSD has bounced initially at price support at .9253. Resistance at .9302 needs to cap keep the immediate biaslower for a clear break of .9253 to challenge the .9205 early April low next. While this should
The basic assumption in Australian monetary policy right now is that the US recovery will push up interest rates in the medium term and that will, in turn, close the yield spread between Australian assets and those in the US, dragging down the Australian dollar. This forecast relies largely upon the expectations of the US
China Securities Journal editorial via ForexLive: Recent yuan depreciation will provide a cushion and leave room for future increases should China face intensive capital inflows again if both Europe and Japan expand their quantitative easing programs. Said the Chinese economy can’t cope with any more sharp appreciation because of weak exports so depreciation provides a
From the AFR: Japan’s $1.26 trillion Government Pension and Investment Fund this week announced changes to its investment committee that would fast-track plans to shift money out of Japanese government bonds (JGBs) into equities and foreign bonds. …GPIF, which is roughly equal in value to Australia’s institutionally managed superannuation assets, holds more than half its
From the AFR: Empirically, the Australian currency tends to weaken when commodity prices fall or when domestic interest rates fall relative to those in the United States. It is reasonable to expect the fall in commodity prices since 2011 would weaken the Australian dollar. Similarly the announcement of tapering or an end of quantitative easing
From the AFR: The Reserve Bank of Australia’s move to a “neutral bias” on monetary policy has angered the Abbott government, which believes any upward pressure on the dollar makes economic management in the next two to three years more difficult. The central bank has been informed directly of Treasurer Joe Hockey’s displeasure. The Reserve
From Bloomie: Japan’s second-biggest bond fund is looking to buy the Australian dollar on dips, predicting a slowdown in China won’t derail the global recovery…Kokusai Asset Management Co. had 1 percent of its Global Sovereign Open Fund invested in Aussie-denominated assets on April 10, down from 4.5 percent at the end of September, data on
The RBA minutes are out and were much of muchness with a little more emphasis on the dollar (highlighted). The shift of emphasis was enough to suppress the dollar 30 pips presumably as fears of a return of the jawbone above 94 cents were reignited. International Economic Conditions Recent indicators for the global economy suggested
The ECB and RBA are the two central banks which need the Fed to hike sooner, thus in turn weakening AUD/USD and EUR/USD. However last week we saw a massive re-pricing of Fed expectations, with Dec fed fund futures down 11bp to 66bp and this in turn pushed USD bulls away…recall the Feds median expectation
From NAB this morning via the SMH blog comes a chart of last week’s Commitment of Traders report on the Aussie showing that speculators have shifted to net long, from -4.900 to 3300: As I’ve said before, it’s the large and small speculators that control the market. With shorts largely washed out it’ll be hard
From the AFR: Sydney’s status as the next official yuan trading hub could help Australia tap the vast pool of Chinese savings to fund infrastructure. Prime Minister Tony Abbott, who has badged himself the infrastructure leader, is close to securing agreement on a trading hub that his Treasury has been negotiating for six months. “It is
By Leith van Onselen Today’s better than expected employment data has put a rocket under the Australian dollar, which earlier today broke through $US0.94 for the first time in 2014. According to UBS bond strategist, Matt Johnson, the Aussie dollar is now around 6% overvalued according to the RBA’s own model, and will eventually have
From JP Morgan offers an impressive piece of analysis today: Alongside the ballistic rally in high-yield currencies since early February, volatility in most asset classes is collapsing. Rate vol is within 6bp of its all-time lows in the US, Europe and Japan (chart 1), while G10 FX vol and EM FX vol are within 1
So say the South China Morning Post: At least 40 central banks have invested in the yuan and several others are preparing to do so, putting the mainland currency on the path to reserve status even before full convertibility, Standard Chartered said. Twenty-three countries have publicly declared their holdings in yuan, in either the onshore
The Australian dollar has hit the afterburners, last night rocketing to 93.6 cents before retracing slightly: What’s going on and high will it go? The story is still largely one of carry. With last week’s Chinese stimulus announcement and mediocre US jobs report, markets have settled back into a low volatility paradigm of ongoing Chinese
The US jobs report was out Friday night and was decent but not cigar so far as markets were concerned. The headline number of 192k missed expectations of 200k only slightly but clearly markets were expecting better and sold aggressively. Given the winter softness I’m not sure why. Here are the charts from Calculated Risk:
A couple of forex comments today from the sell-side. Credit Suisse is bullish in the short term: The 61.8% retracement resistance at .9334/38 is capping for now, but we still look for an eventual break higher to our .9410/.9510 basing target. AUDUSD remains in a high level range this week as it consolidates recent gains.
From RBC Capital Markets: AUD (and NZD) have been the two best-performing G10 currencies in the past month. Japanese retail investor trends go a long way toward explaining the outperformance. Over the past several years, AUD had fallen out of favour as an issuance currency. In 2013, AUD denominated uridashis represented just 9.2% of total
Cross-posted from Sober Look: The Eurozone’s unemployment rate is at 12% and holding while the area’s youth unemployment is at staggering 24%. Private lending is still contracting (see post) and disinflationary pressures persist even within the “core” states (see chart). The price stability situation in the “periphery” is starting to look outright deflationary – see chart.
The bitcoin bubble is bursting and I would not be at all surprised if it disappears entirely, nor would I grieve its loss: Yves Smith at Naked Capitalism captures my feelings nicely: Bitcoin is getting hammered today. The Caixin website says it has seen the draft of a Chinese central bank ruling that would require banks and
The Australian dollar is flying towards 93 cents, this time on, well, nothing: No news is now an Aussie spike driver! Must have hits some stops and driven short covering. Meanwhile, according to Citi, exporters are choking. From the SMH blog: Citi and East Partners latest quarterly trade and finance index finds that traders started feeling
The Glenn Greenspan agenda is on track this morning with the dollar launching at 93 cents last night before pulling back to 92.5: The proximate cause remains the same: Glennspan’s embrace of a higher currency and house prices and, internationally, the US bond flattening, which is now royally confirmed with an aggressive long bond bid
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