For all the gloom over China and the sharp falls in coal and iron-ore prices – key Australian exports – the fall of the AUD has been a tame affair. As Greg Gibbs, FX strategist at RBS, notes, AUDUSD has preferred to follow the US equity market, which has been stable around recent highs, boosted by anticipated further quantitative easing from the Federal Reserve.
| AUD versus US and Chinese equities |
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| Source: Bloomberg, RBS |
Still, the downswing in sentiment around China and speculation about the end of the global resources boom has been impossible for the AUD to ignore. It has generated a retreat in AUDUSD to around $1.03, reversing some of its impressive 10 big-figure rise from $0.96 to $1.06 in June and July.
Some believe that gravity is slowing taking over in the AUD, which correlates both with global risk-on/risk-off perceptions – as pictured by the S&P – as well as domestic rate expectations.
Kit Juckes at Société Générale, for instance, says while Australia remains the world’s highest-yielding AAA market, and while its economy is in better shape than any other G7 country, as the resources boom loses steam, capital inflows into Australia will also slowdown.
“The greater dependence on inflows into bonds and rate-sensitive assets, rather than M&A and investment into mining, will see the rate spread become more dominant,” he says. “That should continue to pull AUDUSD on towards parity.”
Some suspect other forces are at work.
Indeed, the fall in AUDUSD has been quite limited, especially given the extent of long positions in the market, as indicated by the latest speculative positioning data from the CME.
| IMM - AUD largest currency held long against USD by speculators |
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| Source: Scotiabank, IHS, CFTC |
That is especially true in the context of the sharp corrections often witnessed in the AUD – AUDUSD fell by about 10% in May this year, for example, and by a similar amount in September and November 2011.
Helping to prevent a sharper fall in the AUD has been reserve manager buying interest. That has come most notably from the Swiss National Bank, which has been diversifying the proceeds of its EURCHF intervention away from the single currency.
The fact that the AUD is holding up while the country’s terms of trade are deteriorating might well be an increasing concern for the RBA, given that it prevents Australian exporters receiving a competitive boost. Indeed, RBA governor Glenn Stevens expressed surprise last week at how well the currency was holding up.
Michael Derks, chief strategist at FxPro, says if the RBA senses that strength in the AUD is harming Australia’s growth prospects, it might be prepared to use interest rates as a weapon to rein in its currency at next week’s meeting.
“It might just be tempted to slip in another 25-basis-point rate cut in the hope it translates into a weaker currency,” he says.
The currency war might well find a new frontline.