A few AUD charts worth consideration

Today we look at how the market is pricing the Australian dollar compared with a number of indicators often highly correlated/coincident with the currency. Divergences are notable. Why?

The Australia dollar has suffered a considerable setback of late on global nervousness, but not nearly as much as one would expect given the enormous moves in a variety of indicators that are normally highly correlated/coincident with the Aussie. What is the explanation? Either we have seen a regime change in the Aussie, which is now seen as some kind of safe haven – the perfect “inbetweener” that is neither a massively debt-sullied major developed country nor a thinly traded, highly risky emerging market currency. So, despite a decline in the fundamental support like . But will this continue, or will the “old fundamentals” eventually catch up with the currency, particularly once its housing bubble unwind deepens, which could suddenly challenge the complacent view of the Australia financial sector and sovereign debt picture.

Chart: AUD vs. BHP
One of the more stable long term correlations has been the Aussie and the price of the mining colossus BHP Billiton’s stock, which represents the strength and forward earnings potential of the country’s vital mining sector. Data source: Bloomberg

 

Chart: AUD vs. Big Banks
Could biggest Australia banks might be considered a proxy for the Australian housing market – in any case, consider for perspective that despite their recent decline, each of them is worth far more than the US’ Goldman Sachs. Data source: Bloomberg



Chart: AUD vs. Rate spreads
As the highest yielding of the G10 currencies, the rate view for the Aussie also therefore has the highest beta relative to the market because the RBA has the most to potentially cut as we’ve headed into a global easing cycle in recent months. This would affect the attractiveness of AUD carry trades. The forward rate view has decline sharply in recent months with a Credit Suisse index of expectations suggesting the RBA stands to cut over 125 basis points in the coming 12 months. Data source: Bloomberg



Chart: AUD vs. Saxo Bank Carry Trade Index
Our Carry Trade Index (basically a global measure of risk) went haywire recently and the Aussie responded. Going forward, further pressure would remain on the Aussie assuming the index remains below zero. Data source: Bloomberg



Chart: AUD vs. Emerging Market bond spreads
Emerging markets and their currencies have been under tremendous pressure lately, but this chart shows how the Aussie has escaped a significant portion of that pressure, perhaps based on its “inbetweener” status as semi-safe haven as we discuss above.



Chart: AUDUSD vs. Futures positioning
Finally – we have a look at AUDUSD vs. the weekly  CFTC report on overall non-commercial futures positioning (net position as calculated by longs – shorts).