RBA board member John Edwards recently said that he and his colleagues had not appreciated the lack of impact that the Fed’s tapering would have on currency markets, the US dollar and on the AUDUSD rate in particular.
So as we head toward the FOMC’s announcement on US interest rates tomorrow morning, it is worth revisiting the outlook for the Aussie dollar and just what is holding it up at the moment.
The ANZ’s currency strategist Daniel Been summed up the situation for the Aussie dollar perfectly in a note to clients this morning, writing that:
“The AUD is caught in a tug of war between traditional fundamentals and global liquidity. Currently, liquidity is dominating. However, we continue to think that this is temporary and that the recent extension of the AUD rally has little fundamental grounding.”
He reiterated that even though the Aussie had fallen from recent highs it still remained “elevated relative to fundamentals” and that “commodity prices and interest rate differentials are signalling that the AUD is once again overvalued.”
Been argues that the US dollar’s weakness is keeping the Aussie elevated at the moment.
He says the pick-up in the Australian economy is well understood and thus priced into current levels of the Aussie dollar but that the persistence around these levels will have a negative impact on RBA forecasts of growth.
Tellingly though, Been says that the recent Aussie’s rally is all about liquidity and that “positive shift in perceptions regarding the trajectory of the Australian economy, by a downplaying of the immediacy of the risks surrounding the Chinese financial system, and by a loss of momentum in the US data pulse” had run its course.
As a result Been says: “We are now in a situation for the AUD where the move is being underpinned by momentum, liquidity, and little else.”
His conclusion then for investors this is not “not enough to convince us that being long the AUD is appropriate.”
We’ve been warned.
Business Insider Emails & Alerts
Site highlights each day to your inbox.