MNI ANALYSIS: Things Are Looking Up For The AUD

--Bearish Positioning A Tailwind Amid Yuan Rally

By Stuart Allsopp

     SINGAPORE (MNI) - The flash crash in the Aussie on Jan. 3 could prove a

turning point as a combination of a shift higher in real yields, extreme bearish

speculative positioning, and a recent strong rally in the yuan all point to

strength for the currency and a potential bottom.

     The Aussie hit its lowest level versus the dollar since 2009 earlier this

month but a bullish reversal appears to have been triggered by the subsequent

rally back through 0.70. This recovery is supported by the fact that 10-year

real yield spreads are now back at 3-month highs of around -17bps. While still

negative, the spread is up 18bps from its lows.

     --EXTREME BEARISH POSITIONING

     The bullish reversal in the AUD has fuel in the form of large net bearish

positioning, with net non-commercial short positions remaining near all-time

lows, in excess of 30% of open interest. Such bearishness in positioning has

tended to give way to stabilization or recovery over subsequent months.

     --YUAN RALLY A TAILWIND

     The Aussie should also receive a tailwind from the recent surge in the

Chinese yuan. The yuan's rally may be pointing towards a stabilization of the

economy, and even if this is not the case it should at least make imports from

Australia more attractive. 

     The AUD is no longer the overvalued currency it once was, suggesting that

the mean reversion in valuations that has taken place since the 2012 peak may

have run its course. It is also worth noting that while Australia's terms of

trade have deteriorated over the past month, they remain near 4-year highs

relative to the U.S. This should help the ongoing improvement in Australia's

current account position, reducing some of the vulnerability of the currency to

external shocks.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$A$$$,M$L$$$,MX$$$$,M$$FI$,MN$FI$,MN$FX$]