The Aussie dollar hit a new six-year low of 0.7261 on Friday, according to Reuters. That’s a huge level, some say, because it was the region that the Aussie couldn’t break through after the 0.5960 GFC low.
What was once resistance is now support.
But the acute weakness of last week was built on many weeks of the Australian dollar struggling to find any real support from traders and investors.
That, says Westpac’s head of global strategy Rob Rennie, has led to “more client questions along the lines of ‘what will it take for AUD to break below 0.70?’“
Rennie first looks at what will drive “fair value” below 70 cents from its current “fair value range for the A$ between roughly 0.73 and 0.75”.
The answer, Rennie says, is:
We we would need to see:
- our export weighted commodity index about 10% lower
- the Fed deliver 25bps in Sep and Dec
- a range of risk aversion measures above the recent highs
- a return to the kind of aggressive short speculative position seen late 2013/ early 2014
Rennie says that is possible and as a result “we would argue that the risks of seeing AUD sub 0.70 for a period are higher than consensus might acknowledge”.
That begs the question of what will have an impact on consensus?
“I suspect it would not take too much to see expectations for Q1/ Q2 to drop towards 0.70 in coming weeks and months,” Rennie says.
Rennie says it’s interesting how the “surprising part of recent sell-off in the A$ has been the apparent lack of speculative selling”. That means he thinks the downside acceleration could gain pace if leverage players like hedge funds decide to start selling the Aussie dollar.
In the end, his conclusion is that he remains comfortable with his “long standing call that the AUD would be at 0.72 by year end”. He acknowledges the chances of sub-70 cents are real.
But, Rennie still argues “there are factors that will make such a move sticky and slow in nature. Thus at least for the moment I would describe the risks of below 0.70 as low, but worth monitoring.”
So, in answer to the question, it’s possible but unlikely.
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