The dollar: Fact or fashion?
Since early January, we've been bullish the AUD against the USD. Currencies often trade on either fact or fashion; sometimes it can be hard to pin down which one it is! Last year it was certainly fashionable to short the Aussie, and we short we were. Chinese economic weakness was becoming increasingly evident and pushing our Aussie economic outlook down along with it. Anything linked to commodities was kryptonite! Since early this year, indications were that the currency “facts” in our models started to change. The facts being that while Aussie growth and inflation is currently not stellar by any means, the focus for us has shifted to the US, where the weakening pace of growth and disinflationary expectations are outpacing our economic expectations in Australia on a relative basis. With all this fact and fashion running through currencies, the flow on in our eyes will be that a weaker dollar will support commodities, which will then reflexively push capital into commodity-linked currencies, like the Aussie and the Canadian Dollar, both of which we continue to own in our portfolio.