Australian Dollar Stronger for Longer: Nomura

Content provided by eFXnews

Kangaroo bonds - Aus dollar denominated bonds issued by foreigners outside of Australia - are likely to keep the currency bid above its fundamental foundations says Charles St-Arnaud at Nomura, who writes:

AUD has depreciated in recent years, as it adjusted to the lower terms-of-trade stemming from the decline in commodity prices.

However, the currency has remained stronger than the level of commodity prices and the rates differential would suggest.

Looking at the Kangaroo bond market as a possible explanation, we find that net issuance of Kangaroo bonds has pushed AUD to a level that is stronger than suggested by commodity prices and the rates differential.

Net issuance of Kangaroos has been strong in recent years and, since most of the issues are snapped up by foreign investors looking for higher yields, we find that there is a positive relationship between net issuance of Kangaroos and the deviation of AUD from fair value.

The question for AUD is whether the rebound in Kangaroo issuance that we have seen in recent months will continue.

The uncertainty created by Brexit is likely to damp activity in the sector as a result of the increased financial uncertainty, but this is likely to depend on how much of an impact it has on the global economy and confidence and for how long.

Nevertheless, given the continued search for higher yields globally, we believe that Kangaroos are likely to remain attractive and to continue to put upside pressure on AUD.

This means that AUD is likely to remain stronger than fundamentals for some time.