A note from ANZ today on the Australian dollar, in brief:

  • The AUD has had a stellar run to the start 2018, but we fear that it is set to turn lower once again.
  • The influence of rate differentials on currency markets has collapsed to an extreme. They will reassert as a driver, and when they do it spells trouble for the AUD.
  • Further, those drivers, like commodities, risk appetite and the broad USD, which have driven the recent strength in the AUD look to have pushed too far. Reversal is looking more likely then extension.
  • We recommend selling the AUD via options

The note is detailed, bit in conclusion:

  • When looking at the list of traditional drivers of the AUD they are either signalling that it should be a lot lower (in the case of rates) or that its trajectory is at risk of turning (extended price action in commodities, global beta and in the DXY).
  • While we are not yet ready to say that the AUD is standing at the precipice of an extended decline or a test of its cycle lows, we certainly think that relative to December 2017 - when the AUD was trading at around USD0.75 - the risk/reward equation has shifted drastically. With the AUD now trading within 1 cent of our forecast peak, we favour using this strength to reset shorts.
  • We also recommend selling the AUD via options. Buy a USD0.80/0.78 3 month put spread and sell a 3 month, 0.8250 call for a cost of 0.24%

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