The Negatives Are Stacking Up For The Australian Dollar

Getty/Sergio Dionisio

The Aussie dollar is down 1 cent to 0.9268 since Monday’s opening, as traders assess the implications of a potential budget crisis – legislation being blocked in the Senate and claims by the PM that S&P could downgrade the nation’s AAA rating – and the recent crash in iron ore prices.

It’s an unhelpful cocktail if you own Aussie dollars, but might finally signal that its recent rally to 94 cents is finally over.

Throw in comments by RBA Assistant Governor Guy Debelle today implying capital flows will no longer support the Aussie, and we have preconditions that could knock it lower in the weeks, maybe even days ahead.

Traders don’t normally worry about the federal budget, but they are keeping an eye on the actions of the minor parties, emboldened by the crash in government polling support and the collapse in consumer confidence.

It’s the uncertainty that traders and markets abhor. The debate over the budget and the downturn in confidence and government support will leave AUD buyers and holders concerned that about the impact on economic growth in the quarters ahead.

The normal reaction in times of uncertainty is to sell. Indeed the RBA has already argued that the AUD is too high – it should be down around the mid 80s range according the RBA Governor Glenn Stevens – so the preconditions are there for selling.

Annette Beacher, TD Securities Head of Asia Pacific, says Debelle’s speech today makes for a “busy day for soggy AUD-related headlines”.

Beacher says Debelle covers three structural capital flow issues that won’t help the Aussie going forward.

  • No net inflows into the Australian banking sector, which will only roll maturities;
  • Reduced capital flows associated with the mining boom, which has already been financed from offshore; and
  • The increase in foreign holdings from 50% to 70% even though issuance has risen 5 fold.

On the third topic Debelle said:

My general sense is that the bulk of sovereign asset managers now have Australian dollar assets as part of their portfolios, so there are not many new buyers left to emerge. The main chunk of diversification occurred through 2010 to 2012, although demand has remained robust since then.

Beacher says this is code for while there may not be too much selling the “impetus for further accumulation has faded somewhat.”

Indeed as the chart below shows, the Aussie rally looks to be rolling over. How far it falls will tell us if its ability to defy gravity, which has characterised it over the last few years, will remain.

A fall back under 90 cents means it will be back doing the economic job it’s supposed to. It would also be a strong counter balance to any emerging economic weakness as a result of the fall in iron ore or the budget.

Disclaimer: Greg McKenna as a very small short AUD position.

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