Much to the surprise of many market participants, the Australian dollar has traded strongly in the New Year holiday period, reaching USD 0.80 – a level last seen in late 2017.
This article highlights some lesser known positive factors aside from the widely discussed commodity prices and interest rate drivers.
Those factors are the renewed decline in the US dollar (mainly due to Euro strength), massive improvement in the Australian current account deficit and a general ‘risk on’ mentality as global growth has broadened and deepened. These points are illustrated in the following charts.
Firstly, as illustrated in the next chart, there has been a decline in the US dollar Trade Weighted Index (TWI Broad) so it is now testing late 2017 lows.
A major factor behind USD weakness appears to have been the rally in the Euro to around USD 1.22 (see next chart) as economic prospects and financial markets improved in the Euro zone.
Another important positive factor for the AUD has been the massive improvement in the Australian current account deficit (as shown in the next chart from the RBA).
Finally, sentiment about global growth prospects has been very positive and equities markets have rallied. The next chart by the BIS summarises a number of key indicators. This sentiment generally flows into AUD buying as a ‘risk on’ trade.