The Aussie dollar has shown good resilience lately, but that’s unlikely to last.
The AUD had another good run overnight and is trading this morning at a 3-month high above US76 cents.
That marks a shift in recent sentiment for the Aussie, which began the month of June below US74 cents amid mounting downside pressure.
Despite the move higher, like most other major currencies the AUD is still trading within a relatively narrow range amid low global volatility across all asset classes.
However, ANZ’s team of currency strategists argue that the relative calm is unlikely to last.
In a research note titled “The (liquidity) steam-roller is coming”, ANZ said that the policy tide is turning among the world’s central banks. As monetary policy tightens, global liquidity will dry up and that poses a threat to the AUD’s recent strength:
The ANZ analysts said that range-bound trading is likely to remain in place for the next month or so, but they also noted the recent shift in tone by central banks globally.
“Policy tides are shifting and the unwind of the US Federal Reserves’ balance sheet, together with a cautious beginning to normalisation in Europe, will represent a key turning point for our liquidity indicator and will likely dominate markets in the latter part of 2017 and into 2018,” they said.
Over that time frame, ANZ predicts that the Aussie dollar will fall to around US70 cents.
The bank’s analysts said that the US dollar stands to benefit with less money pouring into the financial system as central banks withdraw stimulus.
However, they said that a rise in the greenback is unlikely to stem from stronger US data or rising inflation.
Instead, the US dollar’s standing as a safe-haven currency will drive increased demand from risk-averse currency markets.
Balancing the negative effects of reduced liquidity, ANZ noted that the global economy is in reasonable shape. Improved growth in other major economies outside of the US will limit USD upside.
“Global growth is stronger, and broader, and indeed the market has already been able to see the beginning of a tightening cycle and remained resilient,” the bank said.
Not only is the global economy stronger, but economic growth between different regions is less correlated. That will reduce the risk of a systemic sell-off if global markets react negatively to a controlled reduction in liquidity by central banks.
It’s a key change from 2013, when the mere mention of a reduction in stimulus from the US Fed triggered a “taper tantrum” sell-off.
Turning its eye towards the local economy, ANZ couldn’t find any growth drivers that would support the AUD in the face of reduced global liquidity.
Despite the surge this week on iron ore markets, ANZ said that long-term support from commodities is also unlikely to be forthcoming.
“China’s deleveraging and plans to re-balance its economy both suggest that any rebound in commodity prices is unlikely to be sustainable given concerns around excess capacity,” the bank said.
Weighing up the net effect of both domestic and international market forces, ANZ concluded that the AUD’s recent push above the US75 cents benchmark is unlikely to last towards the end of the year.