Market Analysis

AUDUSD: AUD-led or USD-driven?

Traders who follow the fortunes of the Australian dollar versus its US counterpart (AUDUSD) can take their pick. The Netherlands’ ING bank is somewhat bearish on the Aussie this week arguing that while rising base metal prices in recent weeks have given the AUD a fillip, the Dutch firm’s commodities team now think base metal “prices have deviated way beyond fundamentals, even after acknowledging that these markets are in a deficit environment. ” ING is looking for a pullback in base metal prices in the near-term “retaining a bearish view on iron ore prices” and that this poses “some downside risks to AUD.” On the week ING’s expected range (0.7840-0.7990) is slightly skewed to the left but it’s one month forecast is for the AUDUSD to be down at 0.7600. But there’s two sides to every story. AUDUSD is comprised of both AUD and USD. Australia’s NAB, although it has been steadfastly bearish on AUDUSD through 2017, has concluded however that the “USD is not playing ball” and that there are now “limited prospects for an early reversal of the now 9.5% fall in the US dollar since the start of the year.” For their part NAB’s one month forecast, though still for a slightly weaker AUDUSD, is 0.7800 raised from 0.7300.

Traders might legitimately point out that both banks still see the AUDUSD lower in a month’s time. And that’s true, although every trader will have his own opinion. But the key difference lies in the emphasis. ING highlights AUD-specific factors (via a consideration of metals prices) while NAB leads with the USD side of the equation. The difference is critical. Traders who are broadly bearish on the US dollar might take some convincing that short AUDUSD anyway makes sense. And given the carry costs of running short of AUD versus USD, USD bulls might think there are cheaper ways of expressing a positive view on the greenback. That therefore begs the question of whether there are enough AUD bears to push AUDUSD in the direction that both ING and NAB, both albeit to different degrees, think the pair should go. The jury’s out on that but analysing what might drive the pair may help in forming a view on it.

Written by Neal Kimberley, External Currency Analyst.