The Aussie Dollar this morning is drifting back a little from the overnight high of 0.9187 but it remains at its highest level in more than two weeks.
The key driver of this strength has been a recognition by traders and more likely longer term investors that after a period of pretty weak global growth things are looking brighter around the world. In a note to clients yesterday the ANZ Economics team wrote:
Our ANZ global lead indicators lifted strongly again in August with growth leadership passing to the developed economies, although China has stabilised. The key issue is whether momentum slides as in 2012 or whether the lift can be sustained into 2014.
You can see this graphically in the chart below of the Citibank Economic surprise index for the USA, Europe and the G10 as a whole. A print above 0 means that data is stronger than economists and the markets thought it would be.
It is important to note that Australian data has been weak and the Citi surprise index for the Australian economy is actually quite poor – but that doesn’t matter because Australian Dollar traders like to think of Australia as a proxy for global growth. It’s the role the Aussie has played in traders minds since the float back in December 1983.
This is really important because now that the dark days of the GFC have passed the Aussie can resume its rightful place in global investment portfolios and traders minds as the world’s favourite punt.
That is, if growth is positive and or rising then buyers for the Aussie dollar start lining up.
Because Australia, and Canada to a certain extent, remain the only deep, liquid and developed markets which sell the “stuff” that drives global growth. Iron Ore, Coal – both types, Bauxite, Uranium, Copper, Gold, nickel and so on.
So traders understand that Australia is leveraged to global growth and when it’s positive they buy, when it’s negative they sell.
So with data printing better in the developed world and with China stabilising, the Australian Dollar bears are under pressure as sentiment turns in favour of the Aussie.
Last night the CBA’s Head of Currency Strategy, Richard Grace, put out a note to clients saying,
A number of economic factors suggest AUD/USD could lift from its current level of 0.9090 to 0.9400.
Global PMIs are picking up, suggesting accelerating global economic growth. Global inflation may have also bottomed.
Australia’s two‑year bond yield is back above the RBA cash rate and Australia’s terms of trade have modestly lifted.
This is a really important turnaround and summarises what the market seems to be thinking as well.
After falling 17 cents since April in what has been a fairly unrelenting dive, the Aussie is find some real support below 90 cents and Grace’s target of 94 cents – while not without risks – may be too low, with many traders targeting a move into the 95-96 cent region once 93.50 breaks.
Greg McKenna is an active currency trader – but his trading is in hiatus at the moment.