• Conditions are perfect for a strong AUD.
• Poor US data keeps the Aussie buoyant.
• US stocks rally 3.28% (5 days)

The best case conditions for the Australian dollar to put on a significant amount of weight are currently being achieved. These include a combination of lacklustre, but not weak, economic data in the US and strong equity markets globally. With these conditions the carry trade of investing in higher yielding currencies is achieved because of the longer-term time frame of having higher interest rates locally. Also, higher equity markets boost risk appetite and reduce the risk of the interest rate gains being pared due to weakening demand for the Aussie a “risky currency”. We’ve had both these conditions appear in unison this week and the Aussie has thus continued to put on weight to reach levels of 1.08+.

Despite a vacuum in economic data locally, US data was mediocre at best. The main peace locally came in the form of Wednesday’s Consumer Price Index 3.3% which is outside the RBA’s target range of 2-3%. Governor Stevens recently commented however that they would be “looking through” higher inflation figures for the first and possibly second quarter due to the impact from the natural disasters. In the US, Philadelphia Fed Manufacturing (18.5), Housing Price Index (-1.6%) and Jobless Claims figures were all down on expectations prompting concerns about the recovery and speculation about the fiscal and monetary policy needed to keep their economic growth on track.

Despite the economic data out this week, US equities rallied amidst strong earnings results. The S&P500 rose to levels not seen since June 2008 as General Dynamics, Ford Motor Company, 3M Co and UPS among others posted strong earnings figures. US stocks have rallied 3.28% since Tuesday last week however the AUD hasn’t put on a comparable amount of weight which may suggest that the market is marginally uncomfortable at levels of 1.0850, unless we see a continued run on US equities.