Royal Bank of Scotland - "One by one the drivers of AUD strength gave way last year, as slowing Chinese growth, falling commodity prices, USD strength and even the narrowing interest rate differential all argued for a lower Aussie. Against this background, the AUD has proven nothing if not resilient, sustained by resource project capital inflows and foreign purchases of AUD bonds. But are these last pillars of support also at risk? The RBA sees mining investment peaking later this year, suggesting a tapering off of these inflows. And trouble may lurk on the bond inflows too: where foreigners bought 88% of AUD govvie issuance in 2010, 2011 and into last year, the RBA reports offshore interests absorbed only 9% of issuance in the recent September quarter. As a result, offshore holdings of ACGBs as a percentage of total outstanding fell over the quarter to 74.4% from 78%.
Still, hope springs eternal, and for the Lucky Country, the currency’s long-awaited demise may be postponed yet again. Commodity prices are staging a comeback, with iron ore soaring on the back of Chinese restocking. Indeed, hopes for a rebound in Chinese growth are also contributing, cheered by an improvement in Chinese equity prices. Meanwhile, FOMC signals notwithstanding, the Fed’s more aggressive QE ensures that USD debasement remains a constant theme. In the short-term therefore, the sun is shining and it’s time to make hay: AUDUSD has further upside, and at the very least looks set to test the 2012 highs above 1.06.
But further out, we are more cautious. Those multiple drivers of AUD strength are undeniably fewer in number; and the returning supporting factors can vanish as quickly as they reappeared. Positioning is stretched in so many ways – AUDJPY positioning in particular is a worry ahead of the BoJ meeting later this month – and the supply of gamma to the downside is likely limited after a couple of months above 1.03. In sum: we like AUD higher – but we will not be greedy."