Forex Flash: Policy-related drivers continue to dictate currencies – UBS

With the dust settling post-RBA, it is worth revisiting some of the non-policy related drivers behind the currency. As always, positioning comes to the fore. On a structural level, we have highlighted for some time that the amount of inflow into liquid 'super-AAAs' over the last 18 months have had the effect of insulating the currency from wider risk swings, both helping lowering the beta on the AUD and secularly compressing implied volatility.

Although the demand was there, the currency actually underperformed all other currencies in G10 bar the JPY. Investors need no reminder of the economic and political volatility out of China last year, where hard landing fears were not alleviated until late in the year, and in hindsight, only briefly. As such, “a China risk premium was already being priced into the AUD. Hence, when the big 'AAA-unwind' in favor of the EUR actually happened, and despite unfavorable commentary from the RBA, compared to the NOK and CAD, AUD hasn't really done that poorly due to the perception that it was always more at risk.” notes Research Analyst Gareth Berry at UBS.