AUDUSD is looking overdone – BNPP

Steven Saywell, Research Analyst at BNP Paribas, notes that the AUDUSD rally appears perplexing in light of the RBA’s recent rate cut.

Key Quotes

“However, our BNP Paribas short-term equilibrium exchange rate or STEER model signals that the rally is strongly linked to the rally in equities rather than relative rates. As markets price in a greater chance of Fed tightening at the September meeting, risk sentiment and equities may come under pressure which would be negative for the AUD.

We stress that Fed Chair Janet Yellen’s speech at Jackson Hole on 26 August may be a catalyst for the market to reprice Fed rate-hike expectations. Accordingly, we believe that relatively cheap options on AUDUSD may provide a first step to position for an AUD pullback.

An analysis of our STEER model signals that global equities are and have been the principal driver of AUDUSD over the past 12 months. Its co-efficient stands at 0.69, by some margin the highest of the five input factors to the STEER model. This figure suggests that for a 10% move in global equities, AUDUSD moves around 7% in the same direction.

BNP Paribas believes that the FOMC will hike rates by 25bp at its 21 September policy meeting, although markets are pricing in only a 26% chance of a hike. Chair Yellen is likely to signal such a hike is possible in her Jackson Hole speech. As markets respond to such a shift, equities and risky assets are likely to come under pressure including AUDUSD.

AUDUSD remains overvalued compared with our medium-term cyclical equilibrium exchange rate valuation model, BNP Paribas CLEER™, of 0.68; it has recently risen from 0.65, thanks to an increase in both Australia’s commodity prices and equities. As markets begin to price in further Fed tightening, such a valuation provides a strong indication of where AUDUSD should stabilise.

FX positioning provides a particular insight in the current environment. Net long AUD positioning has risen sharply in recent weeks from -15 to stand at +23 (on our scale of -50 to +50) according to our overall BNP Paribas FX Positioning Analysis reading. Closer analysis shows varied levels of exposure across the five different input factors. History suggests that the AUD has now reached extreme levels, considering its peaks of +24 in April 2016 and +31 in August 2014.”