With broad based US dollar strength in recent weeks, both the Australian and New Zealand dollar have sold off sharply. The Aussie dollar, for example, has fallen by ~11.4% since late September, while the Kiwi dollar is down ~12.6%. With that the AUD has broken below a key support level (its 2022 lows at 0.62, see fig 1), while the NZD has also sold off to around its lowest level since the GFC.
The key question, therefore, is: Are those currencies about to make new multi-year lows? Or will they soon find a floor and start to rally?
In the medium term, from a macro perspective, the answer depends on the outlook for interest rates. Before December, bond yields in the US, Australia, and New Zealand all moved together (and traded at similar levels). In recent weeks, though, that relationship has rapidly broken down, with a sharp move higher in US yields (see fig 1c, which shows 5 year government bond yields for the US, Australia, and New Zealand). How US growth and inflation evolves in those key economies this year will be key in that respect.
From a shorter term models’ perspective, though, the ‘long dollar’ trade is arguably one of the most consensus (and crowded) positions in macro currently. Consistent with that, speculative positioning in the Aussie and Kiwi is net SHORT (see fig 1d), while our technical scoring systems remain on BUY for both currencies (and recently on strong BUY, fig 1a). Elsewhere USD sentiment is notably bullish (a key contrarian SELL signal). There’s plenty of fuel, therefore, for a rally (at least on a shorter time, multi-month, frame).
Fig 1: USD-AUD shown with 200 day moving average
Fig 1a: AUD medium term ‘technical’ scoring system vs. USD-AUD
Fig 1b: 5-year government bond yields for US, Australia & New Zealand
Fig 1c: Net speculative positioning (no. of contracts) vs. AUD spot price (inverted)