The Aussie Dollar has defied the RBA and everyone else by not going down even though it is high relative to the terms of trade and other commodity based indicators “by historical standards”.
But while much of the good news is priced in, according to Westpac, they believe the stars are “still aligned for further short term strength in the A$.”
Here are 8 charts that show why Westpac thinks there is still room for further upside after a period of stalling in a 93-95 cents range.
Our total yield signal for AUD (a composite z-score of the yield curve, yield pick-up and momentum in yields) has firmed over the last month, consistent with the AUD's near-US4 cent rally over the same period.
The main drivers of the push higher in the level of the probability model have been the rebound in commodity prices and the improvement in the interest rate differential (which has reflected both better domestic data in Australia and some disappointment around data outcomes in the US). If the probability level gets to the 80-85% region we will start to warn that a lot of the good news is now priced into the A$ outlook. The current level (60%) suggests we are still some way away from that point.
While AUD remains slightly undervalued according to our short run TWI fair value model (inputs: 10 yr spreads, commodities, the VIX equity volatility index and the MOVE bond volatility index), recent gains in the currency have closed a good amount of the undervaluation gap. As of Friday, our weekly signal suggests the AUD TWI is about 2.5% undervalued, down from a peak undervaluation of 7.5% a few weeks ago.
Our growth factor signal (a cross sectional z-score based on the OECD leading indices, business confidence and unemployment) for Australia is trending higher.
After a period of extreme volatility early March, arguably driven by concerns about the outlook for growth and volatility in local markets in China, commodity markets have bounced through late March and into April. Westpac's Australian Export Commodity Index has risen by 3.7% since March 20. The A$ has appreciated by 4% over that period.
The A$ has traditionally had a reasonably strong relationship with Asian free float equity indices. Given that 65% of Australian merchandise exports go to Asia (China, Korea, Taiwan and Japan), this makes sense. While in a levels sense, this relationship broke down last year as the RBA policy rate fell below 3%, in a directional sense, the relationship remains. The recent strength in Asian equity thus remains a positive for the A$.
With rates markets toying with only about 10bps of rate hikes by the end of this year, it's hard to see a compelling argument for the speculative community building a significant long position above the 0.95 level.
In a trend, price rarely spends material amounts of time more than 200 points ahead of the 20 day MA. On Thursday, price traded 235 points above the 20 day MA (0.9225), highlighting a need to correct.
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