The selloff in the Australian dollar this year has stalled -- here's why

Star Wars/Lucas FilmsThe Aussie dollar has been contained over the past coupe of months.
  • The Australian dollar has been stuck in a narrow trading range against the Greenback for the best past of two months.
  • This reflects that strength in commodity prices and investor sentiment has been enough to offset a continued widening in US and Australian interest rate differentials.
  • Westpac says the AUD/USD is currently “cheap” based on its fair value model, but not by any significant margin.

The Australian dollar has been stuck in a narrow trading range against the Greenback for the best past of two months, oscillating between .7310 and .7480 since the middle of June.

As seen in the AUD/USD daily chart below, it’s been fairly dull compared to periods in the past, leaving the Aussie trapped below the 75 cent level.

Investing.comAUD/USD Daily Chart

So why has the Aussie’s move lower since the beginning of the year suddenly stalled?

These excellent charts from Robert Rennie, Head of Market Strategy at Westpac Bank, help to explain why.

In short, the Aussie continues to find support from higher commodity prices and still-elevated levels of investor sentiment, helping to offset the effect of widening interest rate differentials between the United States and Australia.

Here’s how the AUD/USD compares to movements in Australia’s export-weighted commodity price index.

Westpac Bank

And how the AUD/USD is currently faring compared to sentiment levels in high-yield debt markets.

Westpac Bank

However, in contrast, the AUD/USD is significantly higher that what would normally be the case given the current spread between 2-year US and Australian interest rate swap yields has fallen to the lowest level since 2000.

Westpac Bank

Given these push and pull factors, Rennie says it has left the AUD/USD sitting marginally below the midpoint of Westpac’s fair value model of 75 cents.

Westpac Bank

As for what may break the AUD/USD out of its sleepy trading range, one suspects it will be a change in commodity prices, investor sentiment or the outlook for interest rate settings in either the US or Australia will be the catalyst.

In the interim, and given current trends, it seems unlikely to break higher or lower for some time yet.

You can follow Robert on Twitter here.

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