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“Stay Away from the Australian Dollar”

By David Llewellyn-SmithForexSep 16, 2021 09:44
“Stay Away from the Australian Dollar”
By David Llewellyn-Smith   |  Sep 16, 2021 09:44
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My charts are still down today. DXY and AUD were basically stable. Oil took off and Treasuries were hit. Stocks loved it all. Here’s Credit Suisse (SIX:CSGN) with an outlook that I agree with:


Last week’s ECB meeting saw the market’s core expectation–a PEPP “taper” accompanied by a commitment to longer-term asset purchases / dovishness–easily met, leaving the EUR with no tail wind to make further ground despite the recent rise in longer-term euro area bond yields. Although 10-year US vs Germany rate differentials have tightened from Aug highs, they remain well above 2021 lows, making it hard to get too excited about spread moves as a driver for a higher EURUSD. Nominal rate differentials across the board continue to favour the USD vs EUR. The story for real rates is even more damning for the single currency given the recent jump in 5y5y euro area inflation expectations. Historically, a subset of EUR-bullish investors have based their case on the idea that the currency represents longer-term “value”, based on some combination of delivering positive valuation changes in PPP terms over time due to persistently lower euro area inflation, alongside real rates that might at times have appeared attractive compared to the US. Now, this group is seeing that valuation argument tested by the tremendous decline in longer-term real rates that is unfolding alongside the convergence of longer-term inflation expectations with US levels. The fact that the ECB is the principal architect of these outcomes adds insult to injury, especially given the fact it rarely tries to hide its preference for a weaker EUR. Certainly nothing emerged from the ECB meeting that left us feeling uneasy about our current EURUSD 1.1600 target.

In a similar fashion to the ECB, the RBA’s Lowe yesterday validated the scepticism we expressed last week about chasing AUD rallies (link) by saying “I find it difficult to understand why rate rises are being priced in next year or early 2023”. Lowe added that,“while policy rates might be increased in other countries over this time frame, our wage and inflation experience is quite different”. In his speech, Lowe dwelt on factors ranging from structural weakness in Australian wage pressures to the possibility of a protracted period of growth weakness if Australians stay socially distanced once lockdowns end. Staying away from AUD has been a key G10 part of our “Pivot from Asia” message we’ve had since the summer, with one idea we’d put forward being to be long GBPAUD as a play on the UK economy becoming “post-Delta” and opening with some aggression,leading to a BoE hawkish tilt in coming weeks. Lowe’s (NYSE:LOW) comments encourage us to keep this stance. We only see value in AUD/USD itself around 0.7150, and even then only for a) medium-term players wanting to start building positions ahead of an eventual growth normalization in Australia or b) short-term tactical players looking for an extension of current ranges.

As for the USD side of the coin, yesterday’s downside surprise for US Aug core CPI did the greenback no favours, boosting the case of those FOMC voters that see current high inflation rates as transitory. 10-year Treasury yields dropped by nearly 5bp after the data release to 1.28%, the lowest level since 23 Aug. But as this was largely driven by falling inflation break-evens, real yields were largely unchanged and gave no new push one way or another for a general USD move. As the paragraphs above covering EUR and AUD show, it is far clear that the US will be on a solo journey if growth outcomes disappoint /central banks lean dovish in coming weeks. As long as the market can still imagine that next week’s Fed meeting does not rule out the start of a Fed taper in Nov or Dec, the USD can stay buoyed by the possibility that an acceptable Sep payrolls number (release date: 8 Oct) will keep the Fed on track. At most, the downside CPI print at this stage asks questions about how quick the Fed will taper asset purchases and / or how quickly it would raise rates once tapering is out of the way.

“Stay Away from the Australian Dollar”

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“Stay Away from the Australian Dollar”

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