There is a growing, if somewhat pre-emptive, cohort of commentators who are asserting that the Aussie dollar is now a safe haven asset.
But two charts from the NAB’s Global FX Strategy team, lead by Ray Attrill, put some perspective around the debate and show that in a world of low interest rates and volatility, the Aussie dollar is just good value.
To summarise a longer report, the NAB said the Aussie dollar is benefiting from higher yields:
Crucially – and debunking the safe haven advocates – is the fact that the Aussie dollar is simply decent value against all its usual drivers, including commodity prices.
In the end, the NAB has now upgraded its Aussie dollar forecasts from 87 cents in September to 90 cents, although they do still see a drop back toward the end of the year.
Here is a more detailed explanation of Attrill’s current thinking on what’s driving the Aussie:
Having earlier defied the lure of sharply lower iron ore prices, the AUD at the end of last week also proved immune to rising geopolitical tensions centred on Iraq. While the latter has been associated with a rise in the market’s favoured short-hand global risk appetite proxy – the VIX – there hasn’t been a similar spike in pure FX volatility. On the contrary, on Thursday night AUD implied volatility fell below its pre-GFC (November 2006) lows. It has only been lower back in 1996.
This divergence between FX volatility and equity market volatilitygoes a fair way to explaining the ability of the AUD/USD to push above 94 cents. The risk adjusted
attractions of the AUD are back on the rise. Unless or until this situations changes, other fundamental drivers of the AUD are likely to stay on the back-burner, such that the (thickening) wedge between the terms of trade and the trade weighted value of the AUD is likely to remain in place.
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