You’d be forgiven for thinking that with all the US dollar strength at the moment, the weakness in commodity prices this week, the fact that RBA governor Stevens left the door ajar again last night for a rate cut next year, and the lift in geo-political tensions after the Russian fighter was shot down, that the Australian dollar might be weaker this morning.
But nothing could be further from the truth. At 0.7240 the Australian dollar is opening the new day today at its strongest level since late October.
What’s driving the strength is a combination of factors as investors and traders weigh up the likelihood of another RBA rate hike even though governor Stevens continues to leave the door ajar.
CBA currency strategist Elias Haddad this morning highlighted the changed focus of traders noting that:
AUD is the top performing major currency overnight as RBA Governor Glenn Stevens tempered expectations of more RBA rate cuts in the immediate future. Stevens noted that “a number of data points over recent months suggest that prospects for firmer conditions in the non-mining economy are improving” and that “firms seem to have stepped up their hiring”.
That change in sentiment is seeing less selling of the Aussie dollar at a time when the speculaltive market is almost universally short. Meaning there is a risk of reversal.
Add the fact that the Australian bond market sell-off has outpaced other developed markets, particularly in the AAA rated space, and we’ve ended up with a wider spread to the US and other markets.
That means the pickup available to foreign investors is greatly improved by buying Australian bonds. Yesterday the NAB head of interest rate strategy, Sky Masters, noted that while there had not yet been outright buying again from foreigners the NAB had noticed some improved coverage ratios which was suggestive of a turn in sentiment.
Once again that means less selling of Aussie dollars which, all other things equal, opens up the chance for this move higher.
Of course, 0.7240 is hardly strong. The Aussie failed just a couple of months back to break up and through the 74 cent level on a couple of occasions. But it’s now broken that downtrend, so traders are focused on 74 cents once again.
Here’s the chart:
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