The Aussie dollar might be close to six-year lows again this morning but Westpac’s global head of currency strategy Rob Rennie reckons it’s actually holding in pretty well given everything that is going on in global markets at the moment.
Rennie says he’s recently been “talking a lot more to clients about the factors that are preventing the A$ from dropping near term”. As a result he has published a paper outlining the seven things he sees as the key elements supporting the Aussie dollar right now.
1. The RBA’s recent shift in A$ guidance. Rennie highlights that after spending an extended period talking down the Aussie dollar, the RBA changed its rhetoric to one reflecting a more sanguine outlook. That change in rhetoric, together with “speculative traders now running a fairly sizeable short” position, has seen the pressure released on the Aussie dollar.
2. Market pricing for the Fed. Everyone, including the RBA, thought the start of the Fed tightening cycle would drive the US dollar higher, pushing the Aussie and other currencies lower. Rennie says that “despite fairly clear signals from a number of Fed presidents suggesting the hurdle for not raising rates was high, rates markets have moved recently to reduce pricing for a September hike…This is weighing on the US$.”
3. Iron ore remains stable above $55. Rennie says Beijing’s push for ‘blue skies’ – “extended September holidays being held in commemoration of the end of World War 2” – is driving a significant wedge between iron ore and other base metals and commodities. “As long as this continues, this is something that should continue to support the A$,” Rennie said.
4. Japanese demand continues. Mrs Watanabe has always been an important participant in the Aussie dollar with Japanese retail investors, and their wholesale counterparts, big buyers of Aussie debt and the Aussie dollar. Rennie said that “Japanese demand tends to rise as AUD/JPY drops to and through 90.” With AUDJPY down at this level, Rennie believes that this is another factor supporting the Aussie dollar.
5. Increased A$ bond issuance. Last week Apple launched a massive Aussie dollar bond issue. That’s known as a ‘Kangaroo Bond’ and Rennie says the recent flurry of Kangaroo issuance combined with Federal and State government bond issuance sees August as Australia’s biggest month of debt sales since May 2014. “Increased issuance goes very much hand in hand with increased foreign demand, arguably this is yet another supportive factor for the A$,” Rennie said.
6. The upcoming 20yr bond future. Rennie said that in keeping with increased issuance, “the upcoming 20yr Australian bond future should help to crystallise demand for, and liquidity in, the long end of the Australian curve”. That means more Aussie dollar buying to buy the bonds.
7. Increased M&A activity. M&A was huge during the mining boom of 2010/13, Rennie says. While it slowed in 2014, “recent infrastructure related activity suggests this outflow will have slowed and turned”.
Rennie still believes that the Aussie will ultimately fall and says even though the above points make him sound bullish he “is not”. Rather, “I am trying to come up with a logical set of arguments as to why the A$ is not currently lower.”
In the end though, he says he still sees the Aussie dollar heading below 70 cents this year.