The return of ‘risk on’ has helped propel both AUD and NZD much higher over the past two months, and both are now at record levels on a real effective basis. The mistake is to view them simply in the context of commodity price dynamics and the risk mood. Instead, both currencies have significant downside risks based not only on their extreme valuation, but also on their balance of payments dynamics, poor risk/reward compared with some G10 alternatives, and their declining role as a China proxy as the CNH market develops. Of the two, the NZD seems most at risk because of reduced portfolio inflows at a time when other capital inflows will be waning.
We launch a new section of quantitative indicators including correlations between G10 exchange rates, measures of the dominance of the ‘risk on – risk off’ phenomenon, and risk appetite indices. We will update all of these indicators on a weekly basis.
Click here to read the full report: Global Research
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Global Research