Australian dollar strength to persist on a unique combination of a safe-haven and high yielding commodity currency

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Category: Australian Dollar News

Written by Sam Coventry

The Australian dollar (Currency:AUD) has today been the subject of a bullish research piece from the currency team at Barclays.

Indeed, any hopes being harboured by Australian authorities for a decline in AUD's value could be futile, as "the growing status of the AUD as a safe-haven is likely to provide support for the currency," says analyst Olivier Desbarres.

The note comes as we witness a volatile AUD/USD, but at a higher level.



"The AUD embodies the characteristics of both safe-haven and high-beta currencies, in our view, a relatively unique combination compared with most of its G10, commodity and carry peers. Admittedly, the SEK and NZD have similar characteristics, but do not offer the same amount of high-quality liquid assets," says Desbarres. 

Much has been made of a slowing growth in China - the key export destination for Australia's mighty commodity sector. Any slow down would logically loop back into a weakening currency as trade diminishes.

However, "the AUD enjoys good liquidity, strong country debt dynamics and an AAA sovereign credit rating, which allows the AUD to benefit from safe-haven demand when faced with euro area risks or longer-term global issues that lead, for example, to structural rebalancing of portfolios," says Desbarres.

However, analysts do concede that the AUD is also highly sensitive to cyclical global growth risks, commodity price movements, China’s economic prospects and other short-term issues that lead speculative FX market participants to adjust risk exposure.

As such, given near-term downside risks to equity prices and Chinese economic activity, Barclays maintain their 1-month AUD/USD forecast of 1.01

RBA unlikely to intervene

Moving through the remainder of the year Barclays reinforce their bullish scenario by advising that they see no interest rate cut coming out of the Reserve Bank of Australia.

This contrasts to the likes of ANZ Bank who are calling a cut in November.

Backing the no cut position Desbarres says:

"The RBA is unlikely to intervene to weaken the AUD, in our view, despite the exchange rate remaining persistently high in the face of declining commodity prices and failing to provide its traditional buffer to external shocks. The RBA remains a proponent of Australia’s floating exchange rate regime, in place since 1983. This policy has generally allowed the economy to better absorb external shocks without generating inflationary or disinflationary pressures that occurred in previous fixed exchange rate regimes."