AUD: Recent improvement in the carry - AmpGFX

The AUD, like many currencies, is lower reflecting higher interest rates in the US as the Australian government and domestic swap rate curves are entirely below those in the USA out to at least 10 years, points out Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“The 2-year AUD yield advantage is at the lows since 2000, and perhaps at the low on record for 10-year yields. This might alone argue for the AUD/USD to fall towards 0.65.”

“However, there may be other underlying fundamentals that appear to make the AUD stronger and the USD weaker in comparisons across decades. The Australian current account appears structurally narrower and the US fiscal balance and government debt are significantly worse.”

“Narrowing our focus to more recent developments, one consequence of the tightening in AUD funding costs in the recent months (discussed further below) is that the AUD/USD cross currency basis swaps have risen sharply and have increased the carry return from the AUD.”

“On one level, this may point to economic risks that are negative for the AUD, but it may also provide some support for the AUD. Despite lower interest rates in Australia, the effective 3mth rate in the FX market calculated from AUD/USD forwards have moved above 3mth USD LIBOR.”