Assets on financial markets around the world compete for capital every day.
Should an investor buy Apple or Microsoft, the S&P 500, the DAX or maybe Chinese stocks? Italian or German bonds, US Treasuries or US yield bonds?
Or should they buy the US dollar, the euro, pound, yn or Aussie dollar?
While the news flow gets the daily headlines it is this continuous competition, evaluation and calculation of return expectations, both outright and relative to risk, which drives markets and the huge pools of capital that investors and traders deploy each day.
It a world of low returns, where Australia had a strong economy both outright and relative to the rest of the developed world – and high interest rates – this process drove large pools of capital into Aussie dollar assets and took the Aussie above parity against the US dollar.
But, as the US emerges toward economic recovery, the Fed heads toward the start of its tightening cycle and Australia struggles to make the economic transition to fill the gap after the mining boom, the game has changed. Investors are looking askance at China and its economy as well raising further questions about the Australian economy.
That means changed expectations for the outlook for the Aussie dollar, now back under 74 cents.
And it has fallen out of favour.
So much so that Andrew Sheets and his cross-asset team at Morgan Stanley London now have the Aussie dollar as one of the least attractive assets in their investment universe on a risk-adjusted basis. Increasing global investors and banks, who are downgrading their forecasts, agree.
That means the Aussie dollar loses out to other assets in the global competition for capital and it means a lower Aussie dollar is more likely than not in the months ahead.
Here’s the chart.