The Australian dollar has had everything thrown at it in August. A rate cut from the RBA and its dovish monetary statement just three days later, weak economic data, plus a bumper US non-farm payrolls report for July.
Despite all that, it currently sits at the highest level seen in nearly four months, seemingly finding support on even the smallest of pullbacks.
To Daniel Been, head of FX strategy at the ANZ, there’s a simple explanation for the Aussie’s resilience: it is being driven by a wave of liquidity and improved investor risk appetite, disconnecting from fundamentals that suggest it should be trading lower.
“This break away from fundamentals has been driven by a recommencement of the risk trade,” says Been.
“The correlation among assets has risen once again and the market is once again showing features of a risk on/risk off regime. This is providing a fresh platform for AUD strength.
“This kind of market risks an increase in speculative positioning and will likely push the AUD higher.”
While some believe that the Aussie is now prone to a pullback after such a stellar run, Been doesn’t share that view, at least not in the short term, noting that the week ahead — littered with major releases both at home and abroad — is unlikely to bring much joy to Aussie dollar bears.
If we take the (past) week as the hurdle rate for what is needed to push the AUD lower, then the week to come is unlikely to be able to provide any joy either. In particular, what is becoming obvious is that the threshold for the AUD to re-test lows has risen significantly, and the propensity for markets to move alongside fundamentals has diminished, at least in the near term.
As such, while we are watching the RBA Minutes and the Australian employment numbers closely, neither are likely to be able to drive significant losses for the AUD, even if they point to further weakening in the economy, or further rate cuts ahead.
If there is an event that’s likely to upset the apple cart, Been believes that it’ll come from the release of the minutes of the US Federal Reserve’s July monetary policy meeting in the early hours of Thursday, July 18, in Australia.
“It will provide context around the last meeting, where the Fed was a touch more hawkish than anticipated,” he says.
“Some parallel can be drawn to the April meeting, where the Fed sounded more hawkish, but it was only once the minutes were released and the details of the board’s discussion was revealed that we saw any real reaction in the pricing of the Fed and in the USD.”
However, in the absence of a surprise, Been suggests the current environment doesn’t feel conducive to fighting the trend in the Aussie.
“We do not think this can be sustained, but we do not see the catalyst to try to lean against it quite yet,” he says. “Save your bullets!”
The AUD/USD currently trades at .7694, having hit a high of .7751 earlier in the session.