The Australian dollar has many of the best minds baffled. Not so long ago it was the best ‘risk on’ trade out there. Now, one would argue it’s been one of the best "safehaven" trades of the last few years.
Then there’s the "it’s different this time"/structural change crowd. Whenever you hear this your ears should prick up – it’s a big warning sign.
Basically, the Australian dollar has performed the ultimate chameleon act. Due to the unprecedented actions of the US Federal Reserve, European Central Bank and the Bank of England, the Australian dollar morphed from one of the best cyclical beta currencies into a perceived safehaven play.
As yields globally were artificially pushed through the floor by the bond buying programs of the above central banks, the Australian dollar proved a great place to hide. Why not? Relatively high interest rates, AAA rated bonds and four of the world’s top rated banks – which pay extraordinarily high dividends – have seen a tsunami of money flow into the Australian dollar and assets.
Put simply, it’s been a case of overwhelming demand that has driven the dollar to such lofty levels.
However, I’m firmly of the view that we’ve seen the highs for the Australian dollar. I just can’t see who is left to buy, especially given the high relative yield differentials have peaked.
The Reserve Bank of Australia has cut quite aggressively over the last 18 months, which looks like continuing and it won’t be too long at all before the US Federal Reserve starts to wind back its quantitative easing programs. This will see long term rates in the US rise, making the yield differentials even less attractive and putting a bid under the US dollar.
Gold has long been seen as the ultimate safehaven. The below chart is very interesting.
Basically, for the best part of five years the Australian dollar has tracked the US dollar denominated gold price, which in my eyes confirms the Australia dollar's safehaven status.
As memories of the GFC continue to fade the world will become more risk tolerant. We’re already starting to see it with equity markets across the globe starting to benefit from increased money flows. As this increases, safehaven assets will come under pressure, which I wrote about in detail recently (MARKETS SPECTATOR: The great migration, January 18).
If this scenario plays out, it would be highly beneficial for Australia’s big miners as industrial commodity prices would rise in Australian dollar terms.
MARKETS SPECTATOR: End of the Aussie safehaven
The Australian dollar has been defying the usual forces recently as unprecedented monetary easing pushed international investors towards the currency. But that safehaven status looks exhausted.
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