Report: 'Trouble' Is Coming For The Australian Dollar

Image: iStock

The Australian dollar, like so many other currencies, has rallied hard against the greenback over the past two months.

Since mid-December, the AUD/USD has jumped by over 7%, sending it back over the 80 cent level to within touching distance of fresh multi-year peaks.

Some think it’s only as matter of time before that happens.

While others think the Aussie is destined for even higher levels, ANZ Bank’s FX Strategy Team, led by Daniel Been, does not.

It says that “the risk of a reversal is rising”, arguing that once the rate differentials reassert themselves as a driver of currency market movements, it will spell trouble for the AUD.

“As was the case late last year when the AUD looked excessively weak, we do not think that the current state of affairs is sustainable,” ANZ says.

“There are two elements that are concerning us.

“First, the AUD is currently at an extreme in term of its correlation to commodities, beta and the DXY, all of which have pointed to strength. If this correlation declines and rates — which are signalling weakness — once again become more important, then the AUD will likely fall.

“Second, should these strong correlations manage to hold, we see risks that, at least on a tactical basis, there is scope for commodities to ease, for risk sentiment to sour and for the USD to once again find its feet as the recent strength/weakness in all these factors is at a historical extreme.”

These charts help to explain ANZ’s concerns.

The first shows how movements in the Australian dollar have gone from being largely driven by rate differentials to being highly influenced by commodities and risk appetite from investors.

“The AUD has traded more closely with the broad commodity complex than with commodity prices which most closely proxy Australia’s terms of trade,” ANZ says, noting that its correlation to oil has been higher than the correlation to iron ore recently.

“This highlights that actually the recent strength in the AUD has been more about the decline in the USD, and the general global reflation trade, rather than it being a result of a re-rating of the prospects for the Australian terms of trade.

“This leaves the AUD vulnerable.”

This next chart, as ANZ suggests, show’s that much of the Aussie’s recent strength has been due to US dollar weakness.

“The decoupling of the USD from the recent move in rates is now at an extreme and a re-coupling should be broadly positive for the USD, which is also looking technically very oversold,” says ANZ.

And with the US dollar weakening, it’s seen investor risk appetite hit extreme levels as seen in the recent price action of stocks and commodities.

“Risk appetite — which is a key input into our USD model and a historic driver of the AUD — is also looking very stretched,” the bank says.

ANZ says when “looking at the list of traditional drivers of the AUD, they are either signalling that it should be a lot lower — in the case of rates — or that its trajectory is at risk of turning”.

“While we are not yet ready to say that the AUD is standing at the precipice of an extended decline or a test of its cycle lows, we certainly think that relative to December 2017 — when the AUD was trading at around 75 cents — the risk/reward equation has shifted drastically.

“With the AUD now trading within 1 cent of our forecast peak, we favour using this strength to reset shorts.”

It’s time to sell the Aussie, in other words.


Comments

Be the first to comment on this story!

Trending Stories Right Now