In that regard, Australia and New Zealand Banking Group (ANZ) thinks that as the fall in the Australian dollar has also been clearly evident on the crosses as well, other factors must also be at play.
"One simple explanation is that the recent reduction in the Reserve Bank of Australia’s policy rate has narrowed the interest rate differential.With the currency also vulnerable because of the cancellation or postponement of mining investment projects, this has been enough to push the currency into a new range. These may be legitimate explanations, but they do not explain the move’s speed. Interest rates have been declining for some time, while it has been long know mining investment will peak gradually this year," ANZ argues.
"The missing link can be found in the ongoing re-assessment of global inflationary expectations, which has been occurring in the last few weeks. Market prices are signalling this right now. The precipitous fall in gold prices in April is the clearest example. But other metals prices, in particular silver and copper, are also somewhat weaker. Investors that had positioned for a break-out in inflation on the basis of aggressive central bank easing have now thrown in the towel after growing frustrated with years of waiting. The data simply do not corroborate their fears,"ANZ adds.
Ultimately the key question is what does this mean for the Australian dollar’s direction?
"A clear articulation from policymakers that quantitative easing in the US will remain unchanged implies that the AUD/USD should eventually strengthen. But if commodity prices are not expected to benefit as much as in the past when this happens, any bounce in the AUD/USD should be a little less veracious. As such, a move back above parity is likely in coming weeks, but anything further might be a stretch," ANZ projects.
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