📝Model Shows AUD/USD Decline Attributed to Macro Conditions: Westpac Strategy

AUD/USD is nursing a near 5% decline in the new year, among the weaker major currencies. Slide one sheds some light on the relative significance of key underlying macro trends that have been ailing AUD. Our model decomposes the contribution from commodity prices (grey bars), 2yr and 10yr interest rate differentials (yellow bars) and financial market stress and turbulence in the US (purple bars) and in China (blue bars). Breaking down AUD/USD’s US3.6 cent decline this year, we find:

• – weaker commodity price trends have sliced around US0.6 cents from AUD/USD (grey bars); – The rout in China’s local markets and rising financial stress have sliced about US1 cent from AUD/USD’s value (blue bars); – The decline in AUD-USD yield spreads, driven mostly by the hawkish repricing in Fed rate cut expectations and softer Australian CPI data have sliced about US0.5 cents from AUD/USD’s value (orange bars); and – Against that, still stable US risk premia gauges (purple bars), are making an offsetting positive contribution to AUD/USD, though in the new year they have been largely neutral.

Altogether about US2.4 cents of AUD/USD’s US3.6 cent decline can be attributed to deteriorating macro conditions, and of that, about US1.6 cents is coming from China, via commodities and local market stress. - Westpac Strategy