Date: 19 Jun 2018

Notwithstanding talk of almost AUD1.25 billion of currency option expiries in AUDUSD at 0.7475 spread over at today’s London cut (1500h UK time), the more interesting arguments around the prospects for the Australian dollar arguably revolve around a more macro-economic approach. In the first instance traders will be fully aware that while the Reserve Bank of Australia has been holding steady on interest rates, the Fed has been hiking. Indeed, as US bank BNYMellon noted yesterday “yield differentials are already very unfavourable to the AUD – the spread between Australian and US two-year notes favours the latter to the tune of 53 basis points.” But if long AUD short USD isn’t now a positive carry play, what else might make the Australian currency attractive? In the normal run of events, the AUD has previously been seen, due to Australia’s strong export relationship with China, as a quasi-play on the China growth story.

Yet China is seeking to deleverage its domestic economy while trade relations between Beijing and Washington are materially worsening. To the extent that the market outlook for the AUD is in part reflection of market expectations of China, that outlook has become cloudier. Indeed, perhaps already evidenced in AUDUSD’s fall below 0.7400 in Asia today, traders might conclude that the AUD could remain a  victim of worsening China-US trade relations.

Written by Neal Kimberley, External Currency Analyst.