Market Analysis

The Aussie dollar: Heading further into the Top End or Going Down Under?

Partly supported by decent economic data out of China suggesting a continued appetite for Australia’s commodity exports, the Aussie dollar has forged higher. But Australia’s NAB thinks that the “AUD/USD move above 2016 highs is mostly a USD thing” and that “the (real) AUD TWI is now as much as 10% overvalued.” NAB believes this “should be troubling the RBA.” It remains to be seen if Australia’s central bank will make any public reference to the Aussie’s climb but RBA policymakers will surely have taken note of comments on Monday from RBNZ Deputy Governor Geoff Bascand that a weaker kiwi (NZDUSD, EURNZD, AUDNZD) would help rebalance economic growth in New Zealand. RBA Deputy Governor Guy Debelle’s will be speaking this Friday at an economic conference in Adelaide. That said, NAB, which continues to hold a year-end forecast for AUDUSD at 0.7000, feels as “AUD/USD traded [Monday] through its April 2016 high of 0.7835 and on Friday to its highest closing level since mid- June 2015….

The obvious risk is that AUD/USD now appreciates to at least the 80 cent level in coming days or weeks, consistent with the various bullish technical set-ups implied by Friday’s close.” Traders with existing positions might think that’s perfectly reasonable but others, who thus far not become involved in the Aussie’s rise, might be wary of leaping in at such elevated levels. US bank Morgan Stanley actually thinks that the robust Chinese data which, in part, has helped to buoy the Australian dollar might also give Beijing the confidence “to enter its next round of reducing leverage growth,” with negative consequences for Australian exports and the AUD. It seems it’s an open question whether the Australian dollar is heading further into The Top End or going Down Under.

Written by Neal Kimberley, External Currency Analyst.