AUD: Divergent drivers – Westpac

Rob Rennie, head of FM strategy at Westpac, suggests that the key drivers for the AUD, namely interest rate differentials and commodity prices – have been marching to a very different beat in recent months.

Key Quotes

“On the one hand, the very weak housing/ consumer nexus has pinned interest rate differentials towards 20+yr lows. However, on the other, the horrific Brazilian tailings dam collapse has helped propel iron ore to fresh 5yr highs.”

“With concerns about trade wars, US Government shutdowns, weak China and global growth, Brexit etc, it is hardly surprising that the A$ is towards the lower end of the lower half of fair value.”

“However, as RBA Kent noted, “higher commodity prices appear to have worked to limit the extent of Australian dollar depreciation”. Given the impact of the tailings dam collapse on iron ore is likely to be felt for some time to come, this picture of divergent drivers is likely to continue.”