The Australian dollar continues to drift.
That’s despite the fact that iron ore has leapt to its highest level in a couple of months in the past couple of days.
Certainly, some of the overnight weakness in the AUDUSD is about the stronger US dollar in the wake of the Euro’s German political induced woes. But increasingly I am hearing and reading a renewed focus on the lack of pick up that Australian Government Bonds (AGB’s) offer international investors.
Readers know that has been my hobby horse for a while now.
But it is worth reiterating that the collapse of the 2 and 10 year spread between Australian 2 and 10 year bonds to multiyear lows of 1 and 19 points respectively means that the place the Aussie dollar has played in global bond manager’s portfolio – off index yield pickup – is gone and the Aussie dollar as a consequence becomes an irrelevance to these investors.
And as I have also been writing recently, History tells us that the Aussie dollar usually keeps falling, or rising, until there is a change in the direction of the bond spread with the US.
So it remains pressured and biased lower.
Indeed Morgan Stanley uses this very argument to back a call they now have that the Aussie dollar will fall to 65 cents in 2019. Bloomberg reports the banks said that “in the past, when emerging markets were doing well, people were buying the Australian dollar, it is no longer going to work like this. We are going to see that break simply because there is no yield.”
Which is exactly the point I’ve been making recently. It’s the lesson learned more than a decade when the Aussie dollar spread collapsed to its US counterpart.
There is simply no reason to buy Aussie until the valuation case becomes compelling. That is going to take either an uptick in spread – currently unlikely – or a big fall in the AUDUSD, and Crosses.
For the moment I have 0.7450 pencilled in as solid support. If that breaks then the full round trip to the region from which the 81 cent rally started…that’s around 0.7350/70.
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