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31 Jul 2014
AUD/USD: Bears to win the battle this year - ANZ
FXStreet (Bali) - Daniel Been, FX Strategist at ANZ, notes that the fundamental arguments for AUD weakness remain intact, favouring renewed downside pressure vs the USD this year.
Key Quotes
"The AUD has spent another month trading well above fundamentally sustainable levels, however it remains range-bound having spent the past three months sitting in a three cent range. While investors with a fundamental bias have been disappointed by the increasing divergence of the AUD from the trajectory of interest rate differentials and commodity prices, carry and momentum traders would have likely been equally disappointed. "
"The low volatility environment should have been more conducive to the AUD pushing higher if carry and momentum were still the dominant drivers. Its failure is somewhat telling about the bias of investors and likely means that when the AUD does begin to depreciate in earnest (as we expect it to) it is increasingly likely that the sell-off will be sharper than expected."
"Momentum investors have been building increasingly long AUD positions since April. These positions were entered at best levels of USD0.9250, and likely at an average rate of USD0.9340 based on our reading of the indicators. This means the threshold for shorter term players to become bearish is likely lower than it usually is. The chart below highlights this point."
"The RBA would likely shift their bias to account for unexpected strength in the AUD and therefore should place a cap on the extent to which the AUD can rise from here. The Fed has consistently highlighted that the policy path is contingent on the evolution of the economy. This will be supportive of the USD, will push volatility higher, and tarnish the appeal of carry trades."
"Overall this leaves our outlook unchanged. The fundamental arguments for AUD weakness remain intact, while the prospect that US front end rates remain effectively unchanged is diminishing."
Key Quotes
"The AUD has spent another month trading well above fundamentally sustainable levels, however it remains range-bound having spent the past three months sitting in a three cent range. While investors with a fundamental bias have been disappointed by the increasing divergence of the AUD from the trajectory of interest rate differentials and commodity prices, carry and momentum traders would have likely been equally disappointed. "
"The low volatility environment should have been more conducive to the AUD pushing higher if carry and momentum were still the dominant drivers. Its failure is somewhat telling about the bias of investors and likely means that when the AUD does begin to depreciate in earnest (as we expect it to) it is increasingly likely that the sell-off will be sharper than expected."
"Momentum investors have been building increasingly long AUD positions since April. These positions were entered at best levels of USD0.9250, and likely at an average rate of USD0.9340 based on our reading of the indicators. This means the threshold for shorter term players to become bearish is likely lower than it usually is. The chart below highlights this point."
"The RBA would likely shift their bias to account for unexpected strength in the AUD and therefore should place a cap on the extent to which the AUD can rise from here. The Fed has consistently highlighted that the policy path is contingent on the evolution of the economy. This will be supportive of the USD, will push volatility higher, and tarnish the appeal of carry trades."
"Overall this leaves our outlook unchanged. The fundamental arguments for AUD weakness remain intact, while the prospect that US front end rates remain effectively unchanged is diminishing."