The Australian dollar has been facing a lot of headwinds lately. Crashing commodity prices, an almost universal belief that it was headed to 65 cents, an RBA that left the door open to another rate cut, and the increasing proximity of the first rate hike by the US Federal Reserve since 2006.
Yet despite these headwinds the Aussie has been relatively strong and holding above 70 cents for some time.
That’s not a surprise according to Robert Rennie, Westpac’s head of global strategy. Rennie said that he’s “been running with the view that the A$ would become increasingly sticky around the 0.70 level for some time now”.
He’s identified 5 factors that have been propping up the Australian dollar over the past quarter and is likely to continue through year’s end.
The strength of foreign demand for M&A is clear Rennie says.
“In the year to September, we saw a total of A$26bn of direct investment transactions into Australia. That’s the most seen in any 12 month period bar 2011 which saw SABMiller’s US$13.1 billion takeover of Foster’s Group,” he added.
And foreign buyers are not done yet, Rennie said, noting:
There is a hefty queue of M&A deals that have been announced in the last 12 months that have yet to settle. As we see more of these deals complete, that should add to the equity related inflow.
Rennie says that it’s not just the appetite for M&A driving foreign appetite for Australian equity but issuance on the ASX as well.
“Domestic equity issuance tends to drive foreign demand, and this year has been the best year for equity issuance since 2009,” he said.
Australia’s Triple A rating is driving demand also, with the “year to September 2015 saw a total of A$66bn of debt inflow, the strongest outcome since 2010/11,” Rennie said.
That AAA rating and relatively high rates drives the carry trade out of euro, he said.
“EUR funded carry trades will likely have become an important source of demand for the A$,” Rennie said, adding: “A whopping A$36bn of this (year’s debt inflow) is currency and deposits suggesting that increasing carry is indeed part of the story.”
The market has also been caught uber bearish and mega short. That, Rennie says, has been a factor in the Aussie remaining strong as well as speculative accounts being caught short.
“I also think that speculators will have played a part in this stickiness too. Back in September, when the A$ last traded below 0.70, the speculative community was running significant shorts. However, since then that community appears to have stepped back, adding to demand,” he said.
However Rennie, like many Australian dollar forecasters, says the good times won’t last for the Aussie dollar bulls.
He says that while his “sticky A$” argument appears to have worked well for the A$ through Q3 and will probably continue into Q4, “I am less confident that we will see the same into 2016”.
“The deterioration in the current account, the fact that capital flows are becoming more speculative and that the A$ will become much less attractive north of 0.7350/ 0.7400 all argue this point. Thus I remain happy with our view that the A$ will head towards and eventually through 0.70 as we move into 2016.”
Not many will disagree with him.