AUD/USD and the Yield Curve

AUD/USD for many many weeks experienced severe range compression. Today’s daily range is 16 pips and 10 pips viewed from monthlies. Not much difference from two weeks ago at 15 and 10. Nor does much difference exists in AUD’s overbought yield curve yet nothing changed in two weeks in the yield curve as well as the exchange rate. Australia’s interest rates, yields and swap rates literally far surpass, literally tower over the US, UK, Germany, Canada, France, Italy, Japan, Swiss. Its understood why Big Glenn Stevens always delivers rosy scenario speeches since AUD is held inside a tight noose. AUD 10 year yield at 2.83 for example surpasses the US at 2.22, UK at 1.81, Germany at 0.46, Italy at 1.4, France at 0.77, Japan at 0.31, Swiss at negative 0.35. Only NZD beats AUD at 3.53.
Australia’s problem is its Current Account deficit which rose 41% from 5,532 million to 19,033 and a goods and services deficit rise 102% from 4,860 million to 9,641 million. Exports fell 4,816 million, 6% and imports rose 44 million. Australia is purchasing more foreign goods and services than purchases of foreigners buying Australia’s own goods and services. The other side of the equations is Foreign Direct Investment into Australia remains extraordinarily high. Investment and earnings from Australia’s high interest rates is attractive. A Current Account may show deficit but the Capital Account is in surplus based on high FDI. Big Glenn Stevens in a 2013 speech points to Terms of Trade as the primary economic driver for AUD/USD as AUD moves and is valued by Terms of Trade.
Seen in AUD is the NZD strategy by maintaining yields higher than other nations especially the G10.

AUD/USD has a bottom at 0.7150. To go higher, 0.7242 must break. Below big point breaks are found at 0.7169, 0.7187, 0.7194, 0.7190, 0.7174. Why so many points? Cause AUD ranges are deeply deeply tight. Deeply tight ranges has been the case for many months now and its expected to continue. The best target above is found at 0.7205 and way below 0.7242. The best AUD/USD can see over time is 0.7400’s but I wouldn’t entertain this thought. Wespac Bank is long AUD to 0.7350, good luck. I wouldn’t do it.
AUD will again see its day for the big trend but its not here now. Consider AUD reached 1.1097 in July 2011 then broke 0.9500 May 2013, now 0.71. In 1920, AUD/USD was 2.400. Consider AUD began to Free Float in 1983 and reached 0.9600. The lowest seen since the 1970’s was during the 2008 crisis at 0.5700’s. Then the RBA intervened. AUD will make the big moves when Australia data dictates. I don’t see the same rosy scenario as Big Glenn Stevens and I favor the sell rallies approach. AUD/USD is heading lower but it will take time.

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