It’s difficult to explain today’s AUD rally by anything other than real money investment in Australia. It’s seems as though some very large flows seeped out of Europe and found a home in Australia.
Further confirmation comes from the Aussie bond market which is rallying today (-11 bps in 10s).
The Australian yield curve is also inverted with the 1-year note yielding more than everything out to 7 years. There are few better early-warning signs of a recession than an inverted curve.
The Australian dollar may decline in a recession but it could still tread water against the euro. The Aussie would also outperform on a rebound in sentiment.
