Whilst Deutsche Bank analysts have found that AUD is still highly risk sensitive, given its strong correlation to movements in the S&P 500, there is also evidence of a strong upward structural shift which largely reflects the strength of commodity prices and hence Australia’s terms of trade.
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| Source: Deutsche Bank | Source: Deutsche Bank |
The drop in the S&P500 plummeted to 11-month lows and the AUD falling below parity for the first time since March, illustrates the continued importance of correlation between the two and makes a retest of this year’s lows of 0.988 seem increasingly likely, Deutsche says in the note. However they argue a depreciation beyond that point will be largely dependent on how commodities perform.
They base this argument on the fact that while over the medium term the AUD relationship with monthly S&P 500 movements has not altered much, its correlation with monthly copper prices has seen an increase in the beta.
The price movements of key metals such as copper better reflect the overall prospects for the Australian economy and also serve as a key guide to future RBA rate moves. For these reasons metals prices will be the main long-run drivers for the Australian Dollar, the analysts say.
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| Source: Deutsche Bank | Source: Deutsche Bank |