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The Aussie conundrum

Beyond the US dollar itself, the Aussie has been the biggest surprise so far this year, in terms of its ability to defy gravity.  From the lows seen in January, AUDUSD has risen nearly 8% during the course of the year to date. This has come at a time when events in China have given more cause for concern, which would normally put pressure on the currency. Going forward, there are two schools of thought. The first is that the Aussie is eventually going to succumb and move lower. The second is that we are going to see further support as yields elsewhere move lower, making the yield pick-up available that much more attractive and giving support to the currency. Note that the US 10 year bond is below 2.50% and at the same time, before yesterday’s sell-off, yields on Italian bonds were at multi-year lows, leaving the highs of late 2011 as a distant memory. Longer-term, the Aussie risks still look to be lower, but for now, the urge to defy gravity is likely to remain strong

For today, India is catching the attention as election results start to come through. The currency has rallied as the BJP led coalition has made substantial gains.  This is offering further marginal support to the emerging market area in general.  US housing starts and Michigan confidence are the main points of focus on the data front. For next week, it’s UK inflation data that will be the key focus for sterling, together with Fed meeting minutes. If the recent down-move in US yields is maintained, then this is going to be the main driver for FX and will likely continue to undermine the potential for a sustained rally in the dollar.

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