There’s a reason many old traders call the Aussie dollar the battler. It’s because, aside from the brief period between 2010 and 2014, the Australian dollar has spent most of its post-1983 free float trading life struggling to hold on to any hard won gains.
It was one of those financial market assets that always seemed to “go up the stairs and come down the elevator”. And the price action in July seems to confirm normal transmission has resumed.
Writing in their Global FX Strategist publication, the NAB’s currency team today said the Aussie dollar is performing like “many emerging market commodity currencies in recent weeks.”
“Over the month of July as a whole, AUD is the fourth weakest currency in the entire FX universe, its 5.2% depreciation exceeded only by the Russian Rouble (-10.3%) Columbian Peso (-9.5%) and Brazilian Real (-9.3%),” the NAB said.
That’s not exactly auspicious company the battler is keeping in that pack. It’s not the place for a currency which is among the top 5 traded on the planet.
But then again, perhaps that’s exactly why it does keep this kind of company. If you want an asset which is viewed as a proxy to the big market drivers at the moment — Chinese growth, the commodity complex crash, and signs that emerging market economies and capital markets may be getting into deep trouble — then what better asset to sell than the Aussie dollar.
The NAB argues that the “common feature of the FX landscape in July has been the punishment meted out to currencies of countries with a concentrated export dependence on oil (or oil related products) and/or industrial or precious metals.”
The NAB highlights “industrial metals prices, including iron ore,” lost an average of about 5% in July. Gold fell 7.5% and even though the NAB says it has a weaker correlation with the Aussie than it did in the past, it’s still an important export accounting “for just over 5% of goods exports”. That means it is putting further downward pressure on Australia’s trade price data which, “looks to have fallen by another 5-6% in the June quarter,” the NAB said.
No wonder the Aussie is out of favour.
That’s exactly what the RBA wants. But the Aussie has fallen below Governor Stevens 75 cent region and below estimates of fair value even before the Fed has begun raising rates.
That’s important because the RBA has consistently articulated this would be the catalyst for further falls. Given current market sentiment, when the Fed does start to tighten the risk is weakness becomes a rout, as it has many times in the past.
So the question on traders minds is: What will the RBA have to say about the Aussie dollar, both tomorrow in the Governor’s post-board meeting statement to accompany the decision on monetary policy and also in Friday’s quarterly Statement on Monetary Policy?