AUD: Yield driven currency - Westpac

Robert Rennie, Research Analyst at Westpac, suggests that the Australian dollar tends to be seen as a yield driven currency and with the collapse in AU/US yield spreads to 16yr lows, it’s easy to understand why the market has become more negative on the A$.

Key Quotes

“However, that tends to assume that Australia runs a large current account deficit and tends to fund it through debt. This week’s BoP data suggests neither are obviously the case at the moment.”

“Australia ran its narrowest current account deficit since 2002 in the year to Q1 2017. This A$33bn deficit was over-funded to the tune of A$25bn by a net A$59bn equity transaction inflow. That then meant that Australia ‘had’ to run a close to record A$22bn net debt outflow - had it not, the currency might have appreciated rapidly.”

“Now there are some compelling reasons for this shift to equity funding - the sale/ long term lease of state-owned infrastructure assets plus the asset recycling program was certainly one reason; the recent recovery in the terms of trade driving up mining company profitability another.”

“Whatever the case, this data cautions against getting too negative on the A$ - at least on the basis of yield spreads.”