WESTPAC: Real money is back buying Australian dollars

Photo: Mark Dadswell/ Getty.

The Australian dollar is down a little more than 20 cents over the past two years. That’s been the secret weapon in the economic transmission that is slowly taking place in the economy.

But after two years of selling it seems that real money buyers, investors who manage actual portfolios of client money as opposed to the speculative community and traders, are back and they are buying.

Richard Franulovich, Westpac’s New York-based senior currency strategist, said in a note overnight that there has been an “eye-catching improvement in appetite for AUD”.

That’s in stark contrast to the past year where the real money accounts exposure to the Australian dollar has “been grinding steadily lower for much of the last year, consistent with the evolution in both the currency and its underlying fundamentals,” Franulovich said.

Since September however, the surge has completely unwound that trend. That means, “taken at face value, our data surprisingly suggests that the Real Money community is now close to flat AUD”.

That means they’re not short, sold, Australian dollars anymore and Franulovich says that could be because it “has been trading on a more stable footing in recent weeks compared to the steady depreciation of the prior six-months, perceptions of an impending hard-landing for China have abated somewhat lately, while risk appetite gauges across a multitude of asset classes have recovered substantially in recent weeks”.

So maybe the bearishness is washing out of the market?

Not so fast, says Franulovich. He noted that the “AUD/USD’s price action still looks very underwhelming in light of the very sharp turnaround in Real Money appetite for the currency.”

He might be underwhelmed by the price action against the US dollar but he says the crosses, particularly the Australian dollar-New Zealand dollar (AUDNZD) cross might be headed higher.

Just as Real Money demand for AUD has risen, this same community is now trimming back their NZD holdings, their exposure to NZD hitting its lowest levels this year in recent days. We find that our Real Money flows tend to exhibit strong momentum characteristics and given that we are witnessing an unmistakable shift in preferences back in AUD’s favour a multi-week low for the cross appears to be in place.

Not quite the World Cup but, take that Kiwis. Oh, and the cricket starts in Brisbane today too.

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