Via Bloomberg
I came across a Bloomberg piece advocating caution on the recent AUD strength and that a correction is due either at 0.7184 or before.
The trajectory of the AUD has been strongly up as the optimism surrounding the global recovery post COVID-19 has been supportive. Risk on assets have been roaring over the last few days which seems strange given the risks that are out there: Brexit, US-China trade tensions, China-Australia tensions, ECB decision later today, headwinds from the frugal four concerning the European relief fund, and that is not to mention the second wave infection risk from COVID-19. Yet, the risk on rally continues and drags AUD with it. Check out the chart below to see the relationship between the AUDJPY and the S&P500.
A correction due?
Australia's treasurer Josh Frydenburg admitted the economy may also be in a recession after the GDP print for Q1 and the projections for Q2. Furthermore, if the AUD keeps rising the RBA may be concerned about having to raise interest rates given the economy may be heading into recessionary territory. If the RBA starts purchase bonds across various maturities the AUD will weaken.
US-China and China-Australia tensions will also weigh on the AUD. With around 30% of all Australia's GDP coming from China any tensions with the yuan harms the AUD. This is why the AUD is often traded as a proxy for the yuan. Asset managers as a group are also net short on the AUD, so watch out for any increase in bearishness.
