Investment Research

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Is AUD/USD Risk On The Downside?

Is AUD/USD risk on the downside?

ETFS S&P 500 High Yield Low Volatility ETF (ZYUS)

Key Teakeaways:

  • The AUD/USD exchange rate is currently close to 2 year highs, at just below US 80c.
  • US rate expectations pulled back in July as political developments have cast uncertainty over the pace of US reforms and growth.
  • Investors with a view that the USD is undervalued or the AUD is overvalued can play a reversal via ZUSD, which is the most cost effective way to access direct US dollar exposure with an ETF.
A declining USD has been the key theme in foreign exchange markets this year. The AUD has gained more than 8% from its mid-May lows, while the US Dollar Index (DXY), a measure of the value of the USD against a collection of major world currencies, has dropped nearly 7% over the same period. As shown in Figure 1 the recent appreciation of the AUD has been particularly steep, with the currency peaking at US 80.66c in late July, while the DXY has been in a downward trend for most of 2017, falling over 10% from its peak in the final days of 2016.

Chaotic administration weighing on the US dollar. With the Russia investigation, continual changes in key personnel and failures to negotiate Congress, the Trump administration is failing to meet the lofty expectations set by the market last November. Whilst the Fed is now considered likely to raise rates only once more this year, the US economy is generally in good health. US 10 year treasury yields have fallen by just over 10 basis points since the start of July, suggesting that the long-term monetary policy outlook is relatively unchanged. With temporary factors and uncertainty being the main drivers of the lower dollar, a swift reversal is a possible scenario if confidence is restored. Last Friday’s US employment numbers, which exceeded analyst expectations, were an example, with the DXY jumping 0.75% almost immediately.

RBA talking AUD down. The strength of the AUD has in part been a result of a shift in the expected direction of the RBA’s next rate move. However, the RBA last week noted that the higher currency is a concern for growth and cut its estimates for 2017 GDP growth by 0.5%. Further validation of a slowdown could quickly shift AUD sentiment to a bearish stance.

What does this mean for investors? Investors wishing to express a bullish USD/bearish AUD view may consider the ETFS Physical US Dollar ETF (ZUSD) . ZUSD offers exposure to an appreciation of the USD against the AUD with a management fee of 0.30% per annum, making it the most cost effective ETF offering this exposure in Australia.