27 Jun 2014
AUD expected to remain elevated if carry theme persists - TDS
FXStreet (Bali) - According to Prash Newnaha, FX Strategist at TDS, the AUD/USD is expected to remain elevated around current levels if the theme for carry persists.
Key Quotes
"As we have outlined over the past few weeks, flows have pushed aside traditional market variables that would argue for a lower AUD."
"The implied differential between the 4th Australian Bill Future and the 4th Eurodollar future has dropped 30 ticks in the past week to around 215 ticks. This rapid compression in the short-end spread (which has also been seen at the long end) is a function of the increased probability the market is placing towards the RBA cutting rates 25bps by year end to 2.25%. The OIS curve is currently assigning only a 23% probability to this outcome."
"The last time that the 4th Bill /Eurodollar spread contracted and traded at similar levels was back in January of this year when the AUD was closer to USD0.87 and prior to that in July last year when the AUD was trading around USD0.9050-0.9150. Even looking at inflation break-evens suggest the AUD should be trading lower."
"We don’t expect to see the AUD rally to parity over Q3-Q4 and rather expect it to remain elevated around current levels if the theme for carry persists. Our fundamental views call for Q3 to see the AUD trading at USD0.93 and then to grind lower towards USD0.90 by year end. However, given that we do not expect the RBA to cut, the risk to the FX forecasts is to the upside."
Key Quotes
"As we have outlined over the past few weeks, flows have pushed aside traditional market variables that would argue for a lower AUD."
"The implied differential between the 4th Australian Bill Future and the 4th Eurodollar future has dropped 30 ticks in the past week to around 215 ticks. This rapid compression in the short-end spread (which has also been seen at the long end) is a function of the increased probability the market is placing towards the RBA cutting rates 25bps by year end to 2.25%. The OIS curve is currently assigning only a 23% probability to this outcome."
"The last time that the 4th Bill /Eurodollar spread contracted and traded at similar levels was back in January of this year when the AUD was closer to USD0.87 and prior to that in July last year when the AUD was trading around USD0.9050-0.9150. Even looking at inflation break-evens suggest the AUD should be trading lower."
"We don’t expect to see the AUD rally to parity over Q3-Q4 and rather expect it to remain elevated around current levels if the theme for carry persists. Our fundamental views call for Q3 to see the AUD trading at USD0.93 and then to grind lower towards USD0.90 by year end. However, given that we do not expect the RBA to cut, the risk to the FX forecasts is to the upside."