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.
The Australian dollar is fairly mixed today as the global stock market rebound runs out of steam. As a commodity currency, the Australian dollar is highly sensitive to global risk taking appetite. Today, investor sentiment appears to be waning based on global equity and commodity markets. Looking at Asian financial markets, key stock markets including China's Shanghai Composite and Japan's Nikkei 225 have only rebounded to a very limited extent. Austalia's ASX 200 is currently selling off. Relative to its major peers, AUD is currently flat against the US dollar while gaining against the euro and the British pound. As the currency has been fairly weak in the short-term, our outlook remains neutral. In the medium-term, we remain mildly bullish on the Australian dollar's prospects.
AUD/USD is down slightly and trading just above 0.7920. EUR/AUD is down and trading above 1.5710. GBP/AUD is down and trading above 1.7690.
Looking at economic data from Australia this week, traders will be watching employment figures. NAB business confidence (12 vs. 11 prior) was ahead of previous numbers. Westpac consumer sentiment (-2.3% vs. 1.8% prior) was below previous figures. Tomorrow is the most important day, and we'll see employment changes, the unemployment rate and consumer inflation expectations. On Friday, RBA Governor Philip Lowe will deliver a speech. Last week, the trade balance was significantly below estimates thanks to higher-than-expected imports.
The US dollar is currently trading at three year lows thanks to rising global risk appetite, strong growth outside the United States and a sharp run-up in the Japanese yen. As global equity markets rebound, safe haven flows into the US dollar are reversing. Looking at growth, current and forward-looking indicators suggest that growth in the Eurozone is on track to keep accelerating. While recent Japanese GDP growth was fairly disappointing, the yen strengthened following the announcement due to its safe haven characteristics. As USD/JPY is traded in significant volumes, a strengthening yen tends to weaken the US dollar in relative terms. Turning to US data, the US dollar has been fairly immune to positive economic data and rising US Treasury bond yields. Thanks to solid jobs and inflation figures, US Treasury yields are rising as the market bets on a faster pace of rate hikes. While the buck typically benefits from higher relative interest rates, this isn't the case today as markets expect monetary policy to tighten around the world. Later today, we will downgrade our short-term outlook to bearish, while our medium-term outlook remains bearish.
USD/JPY is down sharply today and currently trading above 105.70. EUR/USD is up and trading above 1.2540. The pound is up, and GBP/USD is currently above 1.4140.
Looking at US economic data this week, markets will be focused on retail sales and consumer price index figures. The monthly budget was worse than expectations. The YoY Consumer Price Index beat estimates (2.1% vs. 1.9% expected). MoM retail sales (ex-autos) were lower than estimates (0% vs. 0.4% expected). Initial jobless claims (230k) and the NAHB housing market index (72) met expectations. The Philly Fed manufacturing survey (25.8 vs. 21.1 expected) was ahead of expectations. MoM industrial production (-0.1% vs. 0.2% expected) and capacity utilization (77.5% vs. 78% expected) were slightly below consensus estimates. Later today, we’ll get housing starts and building permits. Last week, strong PMI numbers suggested a positive outlook for US growth.
As AUD/USD runs out of steam, we are now neutral on the pair in the short-term. Looking at a daily chart of the currency pair, AUD/USD is now trading within a normal range. This is based on technical indicators on a daily chart.
As the pair strengthens, we are now bullish on AUD/USD in the medium-term. Looking at technical indicators on a weekly chart, the exchange rate is now within normal trading conditions.
For a currency that strengthens when global growth accelerates, recent moves in the Australian dollar have been fairly disappointing. While the currency rocketed higher between mid-December and late January, the Australian dollar has sold off sharply in recent weeks. The currency first began weakening against the Japanese yen, which led us to downgrade our short-term AUD/JPY outlook to neutral on…
Looking at the latest COT report, there are new extremes in short Australian dollars and long euro positions. Long crude oil net positions continue to look fairly crowded. The US dollar remains out of favor, but positioning is not yet at a bearish extreme. Notable e…
In this week’s eventful COT report, there are new extremes in long British pound and short Australian dollar positions. Short Swiss franc net positions are no longer at an extreme, while long crude oil remains a consensus long position in the speculator community. This is shown below. Notable extremes are…
The US dollar currency index, a measure of USD against six major peers, declined by 9.9% in 2017. Last month, the currency index continued declining and fell by another 3.3%. Given the speed of the recent decline, the US dollar started looking oversold according to technical indicators around mid-January. While we warned that the currency was looking oversold in several recent editions of our US …
Looking at this week’s Commitments of Traders Report, bullish extremes continue in long crude oil, the euro and the British pound. Net long positions have also grown this week for the two currencies and the commodity. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direction, we fla…
After President Trump unveiled his tax plans, many had predicted that the US dollar would strengthen thanks to the inflationary impact of reducing taxes by $1.5T. According to academic theory, an economy with limited slack and high growth is at the risk of overheating if fiscal stimulus is excessive. This is especially true as crude oil (a significant driver of inflation), continues to make multi…
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:
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.