AUDUSD to find dip buyers?
On Monday RBA's Deputy Governor Debelle signalled very little urgency to take measures that would sustainably weaken the AUD. Debelle did utter that magic words 'negative rates are possible' which sent AUDUSD under 0.72. However, looking at the speech as a whole means the AUDUSD is likely to show resilience
The RBA's focus on the short end of the bond market makes the way for longer end yields to rise high enough to boost the AUD. The AUD 10 Year bond now pays 20bps more that US Treasuries. Have a look at the chart below where you can see the yield spread between the AUD10Y-US10Y(blue line) and the AUDUSD chart (candlestick chart).
If you look back to 2018 and 2019 you can see that the yield spread was offering a discount. The spread remains in positive territory now, so AUDUSD buyers should remain buying on dips. It is just a question of how deep those dips will be. The RBA's yield curve control should support AUD strength as they need to encourage foreign investors to buy federal and state bond issues. This will mean that policy makers will want to keep a high enough yield to incentivise high enough inflow of investors. So, in a risk off environment the AUD is set to weaken further. However, the AUD is well placed to pull out strongly when the rebound comes. The recent lows down at 0.5400 should be a reliable bottom and any heavy falls into any where down towards that area should find confident dip buyers. So, worth bearing in mind for the longer haul as long as the yield advantage remains over US treasuries for the Australian 10 year bond.
