Famous last words, of course, but it looks like US78c was the Aussie dollar’s peak and it could be downhill from here.
The US dollar’s 2017 bear phase looks to have bottomed out, with the market repricing both the chances of a rate hike and tax reform (probably wrongly on the latter, in my view, see below).
The downward risk for the Aussie is that US dollar positioning is short and with long yields rising and cash rate hike in the offing, there could be an outsized move up.
Adding to the AUD’s vulnerability, the data out of China is been a bit softer and the iron ore price has dropped 20%.
Mind you, there’s been a big divergence between oil and iron ore lately, and with LNG exports ramping up, our currency is becoming more exposed to the oil price instead of just iron ore. And that means being exposed more to the United States, as opposed to China – the US is the largest consumer of oil globally – 21% versus China’s 12% of demand.
A further downside risk to the A$ is that interest rates in Australia are likely to go up much more slowly in the months and years ahead than in the US, because of the higher household debt here, greater fragility of the housing market and therefore consumer spending.
The interest rate futures market is currently pricing in two RBA hikes next year, but that looks unlikely, despite the strength of the labour market. Meanwhile, a rate hike in the US looks a near certainty in December.
Foreign currency exposure, either directly or through ASX firms with foreign earnings, is looking a better idea now than it did a few months ago.
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