After May’s dreadful wobble which saw the currency drop by more than 7%, the Aussie is back in traders’ good books. Buying interest since the first day of June has been consistent; overnight it printed a fresh two-month high of 1.0278. In the process, the AUD very briefly traded above both the 200d and 100d moving averages.
Apart from the favourable risk environment generated in response to a more positive EU Summit than expected, a number of other domestic developments have been helpful for the currency. Those extremely heightened expectations of aggressive RBA rate cuts of a few weeks ago have been shaved back – the market now expects the Australian central bank to sit tight when it meets tonight. For example, the 10yr bond yield has jumped 50bp over the past four weeks. Interest rate carry is giving the currency a boost; at 3.5%, the cash rate is the highest of the major developed nations.
In addition, the local economy appears to be weathering the global financial storm relatively well. Last month, house prices in all of the major cities except for Adelaide rose by at least 1%, suggesting that lower interest rates are making a difference. The labour market has looked perkier in recent months, and GDP in the first quarter was well above expectations. Also, the explosive growth in mining investment down under shows absolutely no signs of ending any time soon.
Finally, as we have been pointing out recently, the Aussie holds a great deal of attraction for foreign investors such as sovereign wealth funds, real money managers and high net worth individuals. In a world where the pool of AAA-rated sovereigns is diminishing rapidly, Australia remains a very sound sovereign credit, with the important caveat of ‘as long as China continues to poor money into the country’.
Right now, the bulls are still in charge where the Aussie is concerned.
