Eight Charts From Westpac That Show The Aussie Dollar Will Be Lower By Year's End

Getty/Hamish Blair

Westpac’s fantastic currency strategy team lead by Rob Rennie was back over the weekend with a note to clients looking at the outlook for the Aussie dollar into the end of the year.

The key message is that:

The risks for the A$ are that we move closer to the 0.90 level by year end driven by:

  • Improving US data/ higher yields;
  • Softer commodity prices;
  • Weaker Chinese data pulse; and
  • An RBA very much on hold.

Here are eight charts that highlight Westpac’s latest thinking on the Aussie dollar.

AUD versus total yield model

The rangebound price action in the AUD TWI over the last month has closely matched our total yield signal for the AUD. The recent upleg in our AUD total yield signal was largely a function of lower global core yields, most notably in Europe and the US. More recently our AUD total yield signal has stalled as AU rates have outperformed. BI: That is fallen relative to offshore

AUD/USD versus probability model

AUD Fair Value Model

Our short run AUD TWI fair value model (based on 10 yr spreads, commodities, the VIX equity volatility index and the MOVE bond volatility index) continues to grind in AUD's favour. Most of the impetus for higher fair value readings in recent weeks has come from the plunge in global bond and equity risk premia, as measured by the VIX equity volatility and Move bond volatility indices. According to our estimates the AUD remains moderately undervalued on a broad TWI basis.

AUD Growth Factor Model

Our AUD growth factor signal (a cross sectional z-score based on the OECD leading indices, business confidence and unemployment)...is showing some signs of stalling lately, led by a modest pullback in the OECD's leading indicator for Australia and a flattening out in business sentiment in Australia in the last couple months. That would fit with some of the mixed signals on the Australian economy in the last month such as weaker retail sales, lending and building approvals.

AUD versus Commodity Prices

the very clear message from the above chart is that commodity prices remain soft and this is something that should weigh on the A$. Over the last month, the iron ore price has fallen by 8.4%, and this has certainly caught the markets attention in recent sessions. However, coking coal prices have actually risen by 1.8% over the same period while copper prices have risen by 4.7%. This has tended to dampen the drop in the overall commodity index and thus the impact on AUD.

AUD versus Asian Equity

The very strong connection between Asian equity market sentiment and the A$ clearly broke down through mid-2013 in levels terms...The recent push towards 7 year highs in composite Asian equity indices suggests that sentiment remains robust and should continue to support AUD on dips

Speculative market now long AUD

If CFTC positioning is anything to go by, the speculative community has shifted from a significant short position late last year/ early this, to one of being decently long. The current atmospherics argue that it is hard to see this long developing further. If anything, we see this as a risk to the near term view for the A$.

AUD technicals suggest upside

AUD/USD has consolidated its position above the 50 week moving average and recently tested and held the 20 week moving average. This highlights a positive MT momentum bias. In the near term, AUD/USD has broken below its 5 month uptrend support at 0.9325 placing it in a consolidation phase. We see a likely near term range of 0.9180 / 0.9320 while this consolidation plays

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