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- A snap back in commodities prices from the 2015 lows
- A Reserve Bank of Australia (RBA) unlikely to move on rates, despite the new paragraph in the April statement
- Carry trade risk, AAA-rated sovereign, premium bond market
AUD/USD was the last of the major pairs to really move on the back of these thematics; however, its 8.5% move from low to high in the past three months shows that these thematics have forced funds to flow back into the AUD. And the actuals supporting this thesis with hedge funds recording their tenth-consecutive week of net longs in AUD/USD.
To give a perspective of the amount of funds flowing through the AUD/USD market, the average daily turnover in the pair is US$369 billion versus the average daily turnover in the ASX of US$3.67 billion. Fund flow trading 101: don’t fight the money flow.
However, it’s not the AUD/USD that is highlighting the perfect storm in the AUD but actually the JPY, the GBP and the EUR. The biggest factor is the carry trade.
Global investors are currently searching for yields conducive of investment. Their investment case:
- Long date maturities – ten plus years at a minimum
- High(est) credit rating (Australia still has and will continue to have a AAA-credit rating)
- Developed nations with stable growth and above global trends
- Yields offering a spread above 150 basis points
Australia ticks all of these points.
The ten-year hit 2.41% yesterday. The record low is 2.25% February last year, despite ‘talk’ that the AAA-rating could be under threat. The talk from international bond traders is that a new record low yield will be printed in 2016.
What’s more is that data from Japan’s ministry of finance from the weekend showed a fifth consecutive month of fund flows into Aussie denominated assets, with February being the largest inflow of funds from Japan since July 2015. The carry trade is clearly at work here, with AUD/JPY facing a ten-year JGB (Japanese government bond) of minus 0.09% versus a positive 2.41% in the Aussie ten-year. Risk-adverse trade might hit the pair but clearly the investment flow is out of Japan. Another example: the German ten-year yield is 0.08% versus the Aussie of 2.41%.
The impact of negative rates is far reaching and slippage from central bank policy abroad means an AUD facing upside pressure due to our premium yield on offer.