Explaining Aussie resilience

As we continue to wait for a resolution of the US debt ceiling and budget situation, it’s worth trying to make sense of the Aussie. It’s a question worth asking because it’s not behaved in the way many had expected, in other words falling as we approached a ‘risk-off’ event.

We’ve done a lot to try to move the debate forward from risk-on/risk-off. During that period of high asset class correlations, it would have been very remarkable to have a situation when the yen was outperforming on the majors (on safe haven status) with the Aussie also doing nearly equally as well, as was the case around the turn of the month. There are three main reasons for this.
Firstly, carry strategies, which naturally are highly correlated to risk appetite, are a far less dominant force for the Aussie. Official rates are nearly half what they were two years ago (2.50% vs. 4.75%), so the pick-up is much reduced and even when rates were higher, the returns were substantially lower vs. the pre-crisis period and risk-adjusted, returns were lower still.
Secondly, if we’re in a phase where we are focusing on sovereign risk again (as was the case in the depths of the Eurozone crisis), then Australia continues to stack-up relatively well. It was relatively unscathed by the global financial crisis and was running a comfortable budget surplus ahead of it. Gross government debt (as proportion of GDP) is around one-fifth that of the US, based on IMF statistics.

Finally, there’s momentum and positioning. After the sell-off seen up to June, RSI has only just turned back to neutral (50 on 14 period measure) having been in over-sold territory in the middle part of the year. Furthermore, CFTC data (admittedly, a small proportion of sentiment) continues to show net short positioning for the Aussie, even though we’ve seen around half of this corrected in recent weeks.

So even if the US does take things down to the wire this week and investors begin to take fright, the underlying dynamics suggest that the Aussie should hold up relatively well.

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