Bullish forecasts for Australian interest rates should continue to support the domestic currency through times of outperformance in the FX Carry Trade, but traders should remain mindful that high interest rates must be kept in context. Yield-seeking investors will always prefer buying the currency that offers superior return. Yet strong exchange rate moves can easily eliminate the gains from interest rate differentials. Such a dynamic underlines why the Australian Dollar will likely remain correlated to financial risk appetite through the foreseeable future.
The S&P 500 finished the week higher and very recent momentum favors further gains. In fact, the benchmark index has now retraced a full 50% of the declines it saw through late January and early February. Despite signs of fragile economic growth, speculators seem willing to push equities to fresh highs. Yet it serves to note that trading volume has consistently been lower through days of rallies and heavier through days of declines. Such poor participation in market advances suggests that the S&P 500 could continue lower through the foreseeable future. Yet as any experienced trader will tell you, the market can remain overbought for far longer than you might expect. We hold a cautiously bullish stance on the Australian Dollar through the very short-term, but we likewise believe that the currency will head lower through the remainder of the year. - DR
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