The Aussie Dollar Is Holding In Even As The Reasons To Ignore It Grow
Axi | Jun 27, 2017 12:46
Originally published by AxiTrader
The Aussie dollar ran up to a high of 0.7598 last night as the US dollar swooned. But its fightback has seen AUD/USD dip back a little to 0.7580 this morning.
That's not a terrible performance by any stretch of the imagination. Indeed the Aussie did better against the US dollar in the first 24 hours trade of the week than any of the other majors.
Though it also must be noted that it was a fairly quiet night overall.
That said when it comes to the Aussie specifically there is more evidence that my hypothesis about international investors moving on from Australia might have some basis in fact the FT reported overnight.
In an article titled "MSCI's China move leaves Australia exposed" Jennifer Hughes writing in the FT said:
"When Chinese stocks won admission to MSCI’s indices last week, Australia was not the first market many people looked to — but it is arguably one of the most affected. That is because in the broader Asia-Pacific region, where investors typically put Tokyo in a category all of its own, wins for Shanghai and Shenzhen will come at the expense of Sydney — already the region’s worst performer this year."
You'll note this was something I highlighted when MSCI made the announcement. Who needs a China proxy when MSCI has just given you 222 Chinese stocks to invest in. And with index cover.
But perhaps the most telling part of the FT article is that over the next decade or so "Australia’s weighting in those same indices (Asia market, Ex-Japan) will have halved to 6 per cent".
As Hughes says at the end of her article "downsizing Australia’s regional weighting will be slow and gradual, but it is yet another reason for international investors to think carefully about where they place their bets in Asia Pacific".
Yup. But looking closer to hand Westpac's currency team yesterday put out a report (HT the boys at ForexLive) which said the Aussie is getting expensive based on their fair value model which includes interest rates, commodity prices, and risk measures.
Regular readers will note these are the very metrics I also refer to in discussing the AUD/USD's moves and outlooks.
So here's Westpac's chart:
That doesn't guarantee the Aussie dollar can't rally. Fair value models are only estimates. Currency levels can and do over or undershoot. But it does suggest unless there is a material change in interest rate differentials, bond rates, or commodity prices the recent range top around 0.7635/40 will be a hard nut to break.
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Looking at the charts this morning the last two trading day's up moves appear to run counter to what looked like an emerging downtrend. But what we can see in the price action as well is that at present the Aussie has around a 100 point trading range between 0.7535 and 0.7635 - give or take 5/10 points.
A break either side will get things moving.
On the day the levels I'm watching on the 4-hour charts are 0.7598/0.7603 and 0.7559/64
Here's the daily chart:
Have a great day's trading.
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