AUD/USD ever-stretched

For those of you looking for opportunities to trade AUD/USD these days, Elsa Lignos, Research Analyst, RBC Capital Markets comes forward with updates. While the Aussie-greenback pair reached a resistance point in February, a little above 0.7440, came off 2% early this month, remaining still the top-performing G10 currency YTD, striding towards a global first place with ZAR, she says.

The AUD/USD appears to be “increasingly stretched”, FX Street reports quoting Lignos. Spreads have moved 30bps in the greenback’s favour since 1 Jan, while AUD/USD maintains close to 5%. Rate spreads however are not the main issue here, but the total yield. AUD holds an advantageous position as a relative high yielder in G10, now with the return of the G10 carry trade. The Aussie also holds up at around 4% YTD comapred with its cousin, the kiwi, passing as a higher-yielding currency in expert eyes. AUD also enjoys the advantage of deeper asset markets than the NZD and unhedged investment. Massive Japanese capital investment continued to flow into AUD bonds. December inflow alone amounts to AUD1.6bn, below the figures published for November (AUD3.4bn), yet the pair withstands remarkably the pressure created by the AUD/JPY rally. However, the Japanese buying is only adequate only from an unhedged perspective – AUD is after all the highest-yielding liquid G10 market-, which means AUD buying, the RBC analyst explains. Last but not least, the AUD is also in the advantage given the iron ore price hikes to 80% over the last six months, +22% YTD, although down by 7% off the late Feb high. Those developments also supported other hard commodity exporters, such as ZAR and BRL.

As regards the Aussie’s movement for the remainder of Q1, Lignos says it id likely to face certain risk due to January’s reversal effect. In short, January moves seem to follow a reversal trend with an impact on AUD, CAD, and NZD through Feb/March. Beyond that, the forecast remains constructive as far as the Aussie is concerned, “at least on key crosses”.  The RBC have also revised their estimates for the end -Q2 marginally higher to reflect 0.75 from 0.74, the expert concludes.

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