AUD/USD - Australian dollar to US dollar

AUD/USD, or Australian dollar to US dollar, is a major currency pair and is heavily traded in forex markets. Given the scale of Australian commodity exports destined for China, the currency is frequently seen as a proxy for Chinese growth. This is especially the case given trading restrictions on the Chinese yuan. During boom times, AUD/USD offers attractive interest rates and tends to appreciate. During economic downturns, the pair tends to sell off sharply. Given the US dollar's status as a safe haven, investors tend to retreat to the dollar when perceived risk is high. 

Outlook
Bearish

Australian dollar daily update

The Australian dollar is currently strengthening against all major currencies. The aussie is up the most against the Canadian dollar today. Yesterday, the Australian dollar ended the day slightly lower against the US dollar. Notably, trading volumes in Australian dollar futures accelerated for the fourth session in a row, rising above 30-day averages. While rising volumes are usually notable, this was not the case yesterday as prices only moved by a small degree. Today's AUD/USD trading range remains 0.7080 - 0.7350. 

While yesterday's employment changes slowed relative to the previous month (and fell below consensus expectations), foreign exchange traders appeared to be more focused on the falling unemployment rate. While the US dollar was up sharply yesterday, AUD/USD ended the session mostly unscathed. Earlier this week, the RBA's Debelle suggested that wage growth is likely to remain weak thanks to a relatively high rate of unemployment. The RBA has previously communicated its desire to see accelerating wage growth before raising interest rates. Yesterday's data suggests that unemployment is now falling, in turn making a rate hike more likely. 

Looking at the aussie today, the currency is rallying in line with a rebound in riskier assets. Following a strong session for most major Asian equity markets this morning, US equity markets and commodities are also rallying. Looking across different asset classes, the S&P 500 is currently up by 0.3% while copper prices are up by more than 1.5% today. As a 'risk on' currency, day-to-day trading in the Australian dollar is often a function of developments in riskier asset classes. 

Despite today's rebound, slowing global growth (now with the US entering a slowdown) means that the Australian dollar is likely to remain under pressure. Our outlook on the Australian dollar remains bearish.

AUD/USD is up and trading just above 0.7130. EUR/AUD is flat and trading above 1.6140. GBP/AUD is down slightly and trading above 1.8280. AUD/JPY is up, and trading above 80.20.

Date Event Actual Previous
October 16 RBA Meeting Minutes
October 17 RBA Debelle Speech
October 18 Employment Change SEP 5.6K 44.6K
October 18 Full Time Employment Chg SEP 20.3K 33.7K
October 18 Unemployment Rate SEP 5% 5.3%
Updated 

US dollar daily update

The US dollar is currently slightly lower against all major currencies except the Japanese yen. Yesterday, the buck moved up sharply for the second session in a row. Beyond the move higher, note that trading volumes in US dollar index futures accelerated compared to the previous session and relative to 30-day averages. This is a sign that traders bought the dollar with conviction. Today's US dollar index trading range is 94.30 - 96.60. 

Following a significant move higher in the last two sessions, the buck is currently taking a breather. As risk sentiment continues to deteriorate, the dollar appears to have found buyers seeking safety. Yesterday, US equity markets resumed weakening, with the S&P 500 ending the day down by more than 1%. Growth-oriented indices, such as the NASDAQ Composite, fared even worse as the US growth outlook darkens. In currency markets, the euro was particularly weak against safe haven peers such as the yen and the Swiss franc. All else held equal, the dollar tends to strengthen in relative terms when 'risk on' currencies sell off.

Turning to the latest news, yesterday's Federal Reserve speakers suggested that the pace of future rates hikes may need to be re-assessed. Federal Reserve Vice Chairman Quarles called for a more gradual pace of rate hikes, suggesting that the Fed should deliver about one hike per quarter. "Absolutely, my path for policy is more gradual" than most other policymakers, he said. St. Louis President James Bullard also noted that continued rate hikes may result in a recession. Specifically, he suggested that the Fed may have to change course if tax cut-fueled growth begins fading in the near future. Following the significant equity market sell-off this month and thanks to recent weakness in economic data (e.g. September retail sales), the Federal Reserve is less likely to continue signaling tighter monetary policy. 

While the dollar has benefited from the relative outperformance of the US economy over the past few quarters, the buck is likely to continue strengthening as US growth begins slowing in rate-of-change terms. As a safe haven currency, the dollar tends to the strengthen the most in response to slowing growth. Our outlook on the dollar remains bullish. 

USD/JPY is up slightly and currently trading above 112.40. EUR/USD is up slightly and trading above 1.1470. GBP/USD is up slightly, and currently above 1.3030.

Date Event Actual Previous
October 15 NY Empire State Manufacturing Index OCT 21.10 19
October 15 Retail Sales YoY SEP 4.7% 6.5%
October 15 Business Inventories MoM AUG 0.5% 0.7%
October 15 Monthly Budget Statement SEP $119B $-214B
October 16 Industrial Production YoY SEP 5.1% 4.9%
October 16 JOLTs Job Openings AUG 7.136M 7.077M
October 16 NAHB Housing Market Index OCT 68 67
October 17 Building Permits SEP 1.241M 1.249M
October 17 Housing Starts SEP 1.201M 1.268M
October 17 Fed Brainard Speech
October 17 FOMC Minutes
October 18 Initial Jobless Claims 13/OCT 210K 215K
October 18 Philadelphia Fed Manufacturing Index OCT 22.2 22.9
October 18 Fed Bullard Speech
October 18 Fed Quarles Speech
October 19 Fed Kaplan Speech
October 19 Existing Home Sales SEP 5.34M
October 19 Fed Bostic Speech
Updated 

Australian dollar to US dollar Outlook

Outlook
Bearish

Updated 

Australian dollar analysis

Australian dollar remains a short opportunity as China continues slowing

In our last commentary on the Australian dollar, we wrote that the currency was an enticing short opportunity thanks to slowing Chinese growth and a bearish trend. Specifically, we recommended shorting AUD/USD as means to express a bearish view on the currency. Since that time, the pair has weakened (from 0.7560), and is trading around 0.7280 on August 13.  Going forward, we see further...

Published 

Australian dollar looks like an enticing short opportunity

In our previous take on the Australian dollar in late February, we wrote that falling commodity prices, an ongoing slowdown in China, and weak domestic conditions (looking at both economic data and monetary policy expectations) were significant headwinds for the currency. Beyond economic indicators, quantitative signals also suggested that the bullish trend was running out of steam. We downgraded…

Published 

Australian dollar forecast: rally set to end

We take a closer look at the Australian dollar forecast, and how domestic and international economic changes are set to impact the currency. From China's slow down to key domestic indicators that reveal slowing growth, we break down why we're changing our outlook on this commodity currency.

Published 

US dollar analysis

US dollar set to rise further as US joins global slowdown

In our previous commentary on the US dollar, we wrote that the buck was set to rise further thanks to our forecast for slowing US growth and inflation. Given the US dollar’s safe haven qualities, the currency performs the best when economic conditions deteriorate. Following the publication of our last commentary, the performance of the US dollar index (a measure of the currency against major pee…

Published 
Tags: US dollar

Even as US outlook darkens, US dollar set to keep strengthening

In our last commentary on the US dollar, we wrote that the buck was set to move higher given underlying economic trends. Specifically, US growth and inflation was likely to keep accelerating, while the opposite was likely to happen in most major regions outside the United States. Following the publication of our last commentary, the US dollar index has strengthened from around 91.80 to around...

Published 
Tags: US dollar

As US dollar rises, time to get bearish

In our previous commentary on the US dollar, we warned that a weak dollar was hiding significant risks in growth-sensitive assets such as equities and European currencies. As the world’s reserve currency, the buck is inversely correlated to most financial assets because most cross-border lending is conducted in dollars. Thanks to a slowdown in economic growth outside the United States coupled wit…

Published 
Tags: US dollar

Economic calendar


Australian dollar to US dollar History

Significance of the AUD/USD pair

AUD/USD is a major currency pair, meaning it is among the most heavily traded pairs in the foreign exchange market. The US dollar is the most traded currency in the world, while the Australian dollar is the fifth-most traded currency. The US dollar and the Australian dollar tend to move in opposite directions over time.

As a global reserve currency and a safe haven, the US dollar tends to depreciate when global economic growth is strong, and strengthens during downturns. Given the Australian dollar’s strong correlation with industrial commodities (Australia is a leading exporter of iron ore and copper), AUD tends to appreciate when commodities rally during global economic booms. During a downturn, the Australian dollar tends to sell off sharply. Relative GDP growth rates for Australia and the United States are shown below:

1-17-2018 AU US GDP
Source: The World Bank, all figures in current US dollars

 

2006 – mid-2008: Pre-financial crisis boom

In the years preceding the financial crisis, optimism for global growth was running high. Thanks to booming volumes in cross-border lending, the US dollar was easily available and kept depreciating during this era. As the world’s reserve currency, the US dollar is a liability currency, meaning that is heavily borrowed in international lending markets. When global growth is strengthening, more and more US dollar loans are issued and chase international investment opportunities. The US dollar thus weakens in response. Given Australia’s high rates of GDP growth and relatively high yields (the Reserve Bank of Australia increased its cash rate from 5.50% at the outset of 2006 to 7.25% by early 2008), the country was an attractive investment destination during this time. Looking at AUD/USD, the pair strengthened from around 0.75 and peaked above 0.98 in July 2008. While the Australian dollar experienced a sharp sell-off in mid-2007 following early tremors in US real estate, the currency recovered and began strengthening once again. Until the US downturn starting in 2007 morphed into a global crisis in 2008, many believed that problems in US real estate would be contained.

 

Mid-2008 – early-2009: The global financial crisis

Starting in July 2008, the Australian dollar began selling off sharply. During that month, IndyMac (a spin-off of Countrywide Financial and a leading subprime mortgage lender) went bankrupt. Rising fears regarding a broader crisis soon led to steep sell-offs in bank stocks around the world.

Prior to the crisis, Australian banks were heavy borrowers of US dollars from offshore lending markets (known as the “Eurodollar” market – note the term “euro” denotes an offshore currency as opposed to the Eurozone’s currency). As Eurodollars were plentiful and fairly inexpensive to borrow, Australian banks found that building their reserves using borrowed Eurodollars was cheaper than raising retail deposits. Australian banks then issued loans (mostly in Australian dollars) in the form of mortgages. Put another way, Australian financial institutions were effectively short the dollar. While this trade worked well when the US dollar was weak and the Australian dollar kept strengthening, it fell apart once the financial crisis resulted in a sharp appreciation of the US dollar.

In mid-2008, Eurodollar lenders began doubting the creditworthiness of foreign financial institutions following a series of bankruptcies. As borrowers were unable to rollover their US dollar liabilities, they sold their assets (such as Australian dollar mortgages) in order to repay US dollar loans. The US dollar thus rose sharply while the Australian dollar began a steep sell-off. Looking at AUD/USD, the pair bottomed around 0.64 in February 2009.

 

2009 – early-2013: Swift recovery

After bottoming in early 2008, AUD/USD soon began a steep ascent. Unlike the US which experienced a severe recession, Australia was one of the few countries in the world to emerge from the crisis mostly unscathed. Furthermore, the Reserve Bank of Australia began hiking interest rates in late 2009, helping widen the interest rate differential between AUD and USD. The US Federal Reserve, on the other hand, maintained interest rates at 0% during this time and engaged in several rounds of quantitative easing (buying mortgage and government bonds using the Federal Reserve’s balance sheet).

The Australian dollar was also supported by the strong rebound in industrial commodities such as copper. As China announced a substantial stimulus program focused on infrastructure investments following the crisis, commodity prices strengthened in anticipation of stronger global demand. As Australia is a leading commodity exporter, its currency strengthened as a result.

Looking at AUD/USD, the pair strengthened to around 0.92 by October 2009. Following a brief sell-off in early 2010 driven by USD strength, the Australian dollar once again began rising. The pair made its long-term peak above 1.10 in July 2011. The pair mostly traded sideways until early 2013. In April 2013, the pair made another long-term peak around 1.05.

 

2013 – 2016: Emerging markets downturn

Starting in early 2013, GDP growth in emerging markets began decelerating. New Chinese loans (a front-runner to emerging markets economic growth), peaked in the last quarter of 2012 and began sharply decelerating. Chinese new house prices (which are fairly sensitive to changes in new credit), also began declining in late 2013. In response to lower Chinese growth, the Reserve Bank of Australia began cutting interest rates, lowering the positive interest rate differential against the US dollar. Other indicators relating to growth such as copper prices (one of Australia’s leading exports) also entered a bearish trend during this time. Looking at AUD/USD, the pair ended the year below 0.90.

The bear market in AUD/USD accelerated in 2014 thanks to the sharp fall in crude oil prices and the euro. Lower commodity prices and a lower euro had the result of strengthening the US dollar by a significant degree. As a result, the Australian dollar to US dollar exchange rate fell further. By the end of 2014, the pair was trading just above 0.80.

Unfortunately, the bear market continued in 2015. Both Chinese growth and commodity prices kept falling, hurting the Australian dollar in the process. AUD/USD ended the year above 0.69. The pair had not traded at such a low value since the 2008 financial crisis.

 

2016 – 2017: Rebound and recovery

While many believed that China was headed for a “hard landing” in 2016, its fortunes reversed and the country entered an upswing. Looking once again at leading indicators such as new Chinese loans, a significant stimulus program in late 2015 helped the economy strengthen in 2016. Commodity prices also rocketed higher in 2016, and especially industrial commodities most sensitive to Chinese growth such as copper.

Looking at AUD/USD, the pair ended 2016 just below 0.73 and ended 2017 around 0.78. Relative to previous recoveries, gains in the currency were fairly mild as the Reserve Bank of Australia was hesitant to raise rates. Thanks to an ongoing housing boom funded by significant consumer borrowing, the RBA was hesitant to catalyze a downturn in the housing market. Despite rising expectations for rate hikes in 2017, the RBA maintained rates at 1.50% throughout the year. As comparable US interest rates rose to 1.25 – 1.50% by the end of 2017, the interest rate differential favoring AUD had fallen significantly by the end of the year.