The AUD has been well supported recently, irrespective of rising risk aversion. However, it still appears that speculative oriented investors have been selling the currency on the back of the RBA’s more cautious stance when it comes to the currency’s valuation and due to intact geopolitical tensions.
All of the above may suggest that the AUD is subject to position squaring related upside risk should risk sentiment fail to deteriorate further or/and RBA monetary policy expectations start to stabilize.
Weakening labour market conditions were among the main reasons driving investors’ RBA easing expectations higher recently. However, as confirmed by the minutes of the last few central bank meetings, additional labour market weakness was already anticipated. Accordingly we expect them to continue communicating that a period of stability is anticipated when it comes to rates.
Elsewhere, central bank President Stevens stressed that most measures would suggest that the AUD was overvalued, and not only by a few cents. However, in a risk friendly environment it cannot be excluded that the currency remains overvalued for longer or becomes even more overvalued. This is especially true as the risk of actual currency intervention appears low.
Regardless of geopolitical tensions we expect risk sentiment to improve over the coming few weeks.
We stick to the view that dips should be bought.
CA