Home World Business Two charts that explain why the Aussie dollar remains in high demand

Two charts that explain why the Aussie dollar remains in high demand

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While off the highs seen earlier this year, the Australian dollar remains well supported at present on even the smallest pullback.

It’s looking resilient despite a sharp drop in iron ore prices, Australia’s largest goods export by dollar value, along with recent weakness in retail sales which has raised concerns about the outlook for household spending, the largest part of the Australian economy.

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Five factors driving the Aussie dollar

Interest rate policy and the price of iron ore are two of five key factors, which can determine the rise and fall of the Australian dollar.

Seemingly, despite those headwinds and stretched long positioning from speculators, the Aussie still remains in strong demand, comfortably sitting above the 78 cent level today against the US dollar.

These two charts from Tim Baker, strategist at Deutsche Bank, go some way to explaining why the Aussie continues to find buyers.

The Aussie dollar is looking resilient despite a sharp drop in iron ore prices and recent weakness in retail sales. The Aussie dollar is looking resilient despite a sharp drop in iron ore prices and recent weakness in retail sales. Photo: AAP

The first shows movements in the Australian/US dollar versus pricing for the Reserve Bank cash rate looking 12 months ahead.

Even with a recent pullback, the expectation that the RBA will start to lift interest rates next year has clearly bolstered the Aussie.

The second chart is also telling, showing the relationship between the AUD/USD to the performance of emerging market stocks compared to those in developed markets.

Baker says that the outperformance of emerging market stocks this year has been a major factor that’s underpinned the Aussie’s rally.

While the iron ore price has dropped, global growth and emerging market equities by extension have supported the AUD,” he says. “AUD tends to do well when emerging market outperforms developed market [stocks].”

Looking ahead, Baker says that the AUD/USD’s recent move back above 78 US cents is likely to be sustained in the near-term, although he thinks that there are downside risks for the Aussie against emerging market currencies.

“Our Blueprint trade is short AUD vs a basket of the Colombian peso, Indonesian rupiah, Mexican peso and Russian ruble,” he says, adding that the Aussie looks quite stretched versus these currencies given where commodity prices currently sit.

This story first appeared in Business Insider. Read it here or follow BusinessInsider Australia on Facebook. 

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