NAB: There's A Simple Explanation For What's Holding Up The Aussie Dollar

The Aurora Australis sailing through the marginal ice zone. Credit: Alison Kohout

The Aussie dollar bottomed out just under 87 cents in January this year and has rallied back to around 94 cents today – for one very simple reason, according to the NAB’s FX Strategy team.

No volatility.

Writing in their bi-weekly “Global FX Strategist” the NAB’s FX strategy team says:

The impact of lower volatility in supporting the AUD cannot be overestimated. In our short term fair value (FV) model that references the AUD/USD rate against 2-year yield spreads, industrial metals, gold and the VIX, almost the entire rise in FV has come from the VIX. There has been some added support from the recovery in the gold price (and which has been boosted by the Fed’s apparent nonchalance towards higher US inflation readings). The impact of slightly lower yields and marginally higher metals prices (ex-iron ore) is negligible. Currently the model pins FV near 0.95.

It’s likely there are a number of asset prices we could assert are benefiting from the lack of volatility in markets.

But there is also a clear warning for traders this week of a volatility spike given the data flow which includes an RBA meeting tomorrow, Chinese and other global PMI’s, an ECB meeting later on in the week, US non-farm payrolls on Thursday, and a raft of other data.

But the NAB FX Strategists also highlight that while the “risk remains for a ‘down the elevator’ crunch lower in the AUD if something transpires to drive volatility smartly higher… short term risk(s) lie to the upside”.

Trying to forecast a spike in volatility is fraught with danger.

So with the Aussie still in the lower half of the two standard deviation present value range unless or until volatility spikes the Aussie may grind higher toward the 96 – 97 cent region.

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