[achiever]

The most significant contribution to explaining AUD moves has come from broad Dollar (TWI) direction. Commodity prices and other risky assets like the SP500 also played a role but were of secondary importance.

Further AUD strength therefore likely depends on further broad Dollar weakness. Dollar fundamentals have “not yet” improved enough to justify genuine strength. Though we see many encouraging signs, including the narrowing real US trade balance, the capital flow situation has remained a drag on the Dollar, as have rate differentials, in particularly relative to the AUD.

The 2-yr swap rate differentials have risen from about 2% in favour of Australia to now 3.6%. Even the 3-mth LIBOR spread has
widened from 2% to more than 3% in the meantime. Clearly, the AUD is starting to gradually become a credible carry destination in G10 space again.

Beyond the trend and Dollar direction the correlation to other risky assets appears less important. But having said that, a combination of rising commodity prices, stronger stocks and higher Australian rates would certainly boost the AUD. Analysts continue to favour such a scenario given the strong cyclical macro momentum currently, though some take note of this week’s surprising correction in equity markets.

Overall, AUD has more upside in the future.