Surging demand for higher yielding currencies send AUD
Lacklustre economic data are piling up in US, the Fed has abandoned its hawkish rhetoric for a cautious one amid faltering inflation pressures. Since mid-May, the greenback has lost more than 5.2% on a trade-weighted basis, while the dollar index fell below 95, its lowest level since September last year, as US rates reversed gains.
Prospects of low interest rates in US have prompted investors to seek higher returns elsewhere and more specifically across the Pacific, namely Australia. Interest rate differential between Aussie and US bonds is appealing for investors. Moreover, the Reserve Bank of Australia has revised its economic outlook to the upside recently and acknowledge the recent improvement, both on the growth and inflation sides.
Investors did not wait on the RBA hawkish tone to start building long AUD position. Speculative positioning, as reported by the CFTC, showed that total net long future position rose from zero to 37.5% of total open interest over the past six weeks. Despite this extreme level, we think they is still room for further increase of speculative positioning as investors will continue to discount a tightening move from the Fed in the short-term.
AUD/USD has broken the key 0.7849 resistance (high from June 2015) and is on its way to test the following one at 0.8164 (high from May 2015). However, a temporary correction cannot be ruled out in the short-term but it will only be a step back to jump higher.
US: downside risks on import prices
The greenback is getting weaker against major G10 currencies and the euro dollar is now back above 1.15 for the first time since May 2016. The bullish trend seems very deep to us and there are two main points to address.
First of all, The Fed is back on hold regarding the normalization of the monetary policy. Anyway, higher interest rates would likely trigger a recession due to the level of indebtness of the North-American country.
Second of all, we have always considered that the true state of the US economy was overestimated and this appear to be the case. Fundamentals are mixed. Today will be released import prices for June and markets expect a decline of -0.2%. In May imports price already declined by 0.3% m/m. Excluding Oil, import prices have stood still.
There is then no fundamental for the greenback to strengthen in the medium rum. The US CPI recoded four successive declining monthly print. The Fed target seems less and less attainable in a reasonable timeframe. As a result, we firmly believe that reloading bullish positions on the dollar is a good bet within the next few months.
