The Australian dollar is strong this morning. Not only is it holding above 72 cents while the US dollar is again strong and back up near one-year highs against the major currencies, it is itself much stronger against the euro, the pound, the yen and the Kiwi over the past week.
That strength flies in the face of still weak commodity prices. Copper made a fresh six-year low at just $2.05 a pound on Friday night, crude oil reversed early week strength to close weaker, and concerns about the global economy remain. Yet the Australian dollar is finding the buyers once again.
Westpac strategist Robert Thompson neatly summarised what might be driving the Aussie recent resurgence with a chart in the bank’s latest Forex Focus publication.
In a world of zero or negative rates, quantitative easing and market uncertainty, Thompson highlighted that Australian bonds have become much more attractive lately as yields have risen faster than competing markets.
Australian bond yields have risen since the RBA kept rates on hold at November’s meeting. Relative to off shore the rise has been striking, with 10 year Commonwealth government bond yields now 67bp above those in the US and 190bp above the average of other AAA-rated nations. While current levels are not overly cheap for bond investors, the movement wider is a shift in the right direction toward encouraging new inflows into the AUD bond market.
In the current environment that is likely, at the very least, to discourage selling. Less sellers opens up the chance for the very rally the Aussie dollar has experienced over the past week.
How far it can rally with commodities weak and the US dollar strong is open for debate. But over the past week, the Aussie has broken both a one- and a 15-month downtrend.
Here’s the latest chart: