Sean Callow, Research Analyst at Westpac, notes that the Australian dollar remains easily the strongest G10 currency this year, up 6.7% YTD against the US dollar, with daylight between the Aussie and second-placed NZD, on 4%.

Key Quotes

“While some of this outperformance is simply reversal of the underperformance in late 2016 as the US dollar lost momentum, there remain solid fundamentals supporting the Aussie that are likely to persist for some time.”

“Commodity prices have underpinned the AUD rally over the past year, with Westpac’s Australian export commodity price index up 60% since June 2016 and 86% from the Jan 2016 lows when AUD/USD was slipping under 0.69. Spot iron ore prices this week reached highs since August 2014 around $94/tonne and seem likely to break $100 soon. China may be tapping the monetary brakes after a hectic start to the year but its fiscal spending plans on infrastructure look firmly entrenched. Moreover, China’s new ban on North Korean coal imports as part of UN sanctions has combined with China’s domestic coal supply cuts to reinforce Australia’s status as the top source of coal imports.”

“Looking at AUD’s yield appeal, the RBA’s optimistic outlook is very clear in this month’s various statements and speeches. This will continue to discourage markets from considering another rate cut in light of subtarget inflation and an economy that looks to have been about flat over H2 2016. Some might wonder about foreign demand for AUD bonds given the chart across, showing a slide in foreigners’ share of what turned out to be a record A$11bn issue. But we view this as a function of low hedge fund allocation and the maturity which is preferred by domestic accounts.”

“So we remain upbeat on AUD on a range of crosses near term, extending the Aussie’s strong run so far in 2017. But again, a resilient US dollar should limit AUD/USD to the 0.7750/70 area near term.”