Forex Flash: FX markets perplexed by strength of AUD – UBS

FXstreet.com (Barcelona) - As central banks have anchored inflation expectations to the best of their abilities, most notably the Fed with their introduction of numerical targets and in the backdrop of ongoing stimulus, marginal interest in inflation protection may have been squeezed out. “As a result, this would reduce the impact of having assets in general serve as inflation protection, and the remaining exogenous driver for assets with 'real' properties would be positioning and growth.” notes Research Analyst Gareth Berry at UBS.

Within the FX realm, the AUD/USD would come closest to matching this description, especially on the positioning level. Quantitative easing by the G5 and China's growth story has led to a structural increase in global portfolio allocations, and it is no surprise that its current correlation to gold is strong. If anything, markets have been more perplexed by the lack of strength in the AUD while other 'real' assets were performing more strongly until now. At the time, we noted that the RBA retained an easing bias, and the carry the currency had on offer was being limited, while investors found risk: reward outside of the traditional AAA assets.