BNY’s EMEA Macro Strategist Geoff Yu notes that the Australian Dollar is benefiting from a sharp rise in cash and short-term (CAST) flows as markets price in further Reserve Bank of Australia tightening. With Governor Bullock stressing readiness to hike against structurally high inflation, Yu highlights strong equity-to-cash rotation and sees Australia as the clearest G10 carry candidate, conditional on global risk sentiment.

RBA stance drives AUD carry appeal

"Presently, Australia is the clearest case of G10 tightening, with Governor Michele Bullock has repeatedly emphasized in recent weeks that the Reserve Bank of Australia (RBA) will not hesitate to move if justified by data. Her warning that the country may be prone to structurally high inflation also suggests hikes will not be tactical and may serve as a clear anchor for carry-seeking flows, if the risk environment allows."

"AUD’s overall flow picture has improved, but the more notable development of late has been a surge into cash and short-term instruments (CAST). Year to date, flows have been unimpressive, but after Governor Bullock’s recent speeches and testimony, Australia’s cash and cash equivalents market appears to have received the message on interest rates."

"CAST flows tend to be highly sensitive to G10 rate differentials. We have identified several candidates already, but only Australia is responding forcefully, fully in line with a relatively simple set of fundamental assumptions."

"We see equity-to-cash rotation as a factor behind the surge, as Australia’s mining sector faces downside risks to elevated levels of global developed market metals and miners’ equity holdings. With high ratings, good liquidity and yields, a stronger liquidity preference for the AUD is no surprise at all."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)