Price action is often very revealing, none more so than on the volatile Aussie dollar. For almost two years now, a quite consistent pattern has emerged. Any dips below parity tend not to last very long, and are met by chunky buying. Also, when the Aussie gets above the 1.07-1.08 level, this also tends to be short-lived, met by equally determined selling. For those involved in the AUD, it is worth being aware of this broad trading pattern.
In recent weeks, the Aussie benefitted from some weighty buying interest after plunging rapidly to a low of 0.9582 on the first day of June from the 1.05 level early in May. A good proportion of this buying was traders covering short positions; at the end of last month, net shorts in the AUD were at a two decade high. In addition, there was evidence of strong buying by both corporate and sovereign wealth funds. Many of the latter are still minded to accumulate the Aussie on weakness – as a sovereign, Australia is one of a rapidly diminishing few that still have an AAA rating.
Another explanation for the improved performance of the Aussie has been healthier economic news down under. This in turn hosed down what was a very aggressive profile for RBA rate cuts being factored into the front end. That said, government bond yields are still a long way below the cash rate – for instance, the 5yr yield is currently 2.42%, vis-a-vis a cash rate of 3.5%. Also, the front end still expects the RBA to lower the cash rate by nearly 100bp by the end of the March quarter next year. If only because these expectations might be watered down further, we may well see the AUD recover further in the near term.