AUD: Blame it on the bonds - Westpac

Sean Callow, Research Analyst at Westpac, suggests that the RBA rate cuts had limited impact on AUD until commodity prices began to tumble and even now, the RBA’s record low 1.5% cash rate isn’t enough to stop the Aussie being labelled a high-yielding currency.

Key Quotes

“But over the past week, rather than continuing to rally in a world of super-low yields, the Aussie has been the weakest G10 currency (-2.5%). The culprit this time is the long end of global yield curves as doubts over the sustainability of ECB and BoJ bond purchases drive a global sell-off.

The rise in 10 year JGB yields is at this stage not nearly as dramatic as other notable bond routs of recent years. We don’t believe we are yet at a major turning point for global yields, given how far the ECB and BoJ remain from achieving their inflation targets and the structural factors we discussed last month (“The Fed’s R-star gazing”, 25/8).

Indeed the FOMC meeting next week seems likely to deliver not just a steady hand on the funds rate but substantial cuts in the projections for the funds rate in 2016-2018 and the “longer term”, with the latter likely to fall below 3%. This should undermine the US dollar and help calm US bond markets. Combined with resilient commodity prices and Australia’s decent domestic data, AUD/USD should find support around 0.74. Yet the BoJ decision on Wed could rattle markets as have most of its meetings this year. Nervous markets seem likely to cap AUD/USD rallies to around 0.76. All eyes offshore this week then.”