We have been highlighting the downward plight of the USD over the past four weeks and the four pairs that have been of significant interest for traders over this period are: EUR/USD, GBP/USD, NZD/USD and AUD/USD.
However, the momentum in the AUD/USD has now become something different altogether and something we want to flesh out further as there are signs that the wave AUD is riding could be sustained for the rest of 2020.
Why is this the case? Technicals and fundamentals are now aligning, and this has driven the AUD to its highest levels in months and could be heading to new highs over coming months for the following fundamental reasons.
Canberra’s strong fiscal stimulus and a steepening yield curve, both which are very supportive for the AUD. The spread between the Aussie-US 10 is back in positive territory for the first time in over 2 years and is becoming hugely attractive for yield-deprived bond investors. The fiscal stimulus is providing a backstop and there is a strong indication that Canberra will do more in the coming period.
The RBA is flatly refusing to entertain negative rates. This is providing certainty around the yield curve and that it will remain a ‘positive’ for the AUD in the foreseeable future.
The Australian economy appears to have been impacted less by COVID-19 than the US. For example: Australian employment versus the US, the speed at which the economy is reopening compared to the US.
The commodity price surge, which is being fuelled by improving economic conditions in Asia coupled with stimulus out of China. Iron ore, copper, and coal are either at 3-month highs or in the case of iron ore, it is at several-year highs.
Then there is the Fair value calculation which suggests that the AUD is trading at an approximate 10% discount based on PPP.
The caveat to these points is: recovery slows, the simmering geopolitical tensions spill over into full-blown issues and the risks of a second wave. But all things remaining equal, the AUD/USD is likely to continue to ride the wave.
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