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The global hunt for yield has favored the AUD, which is currently outperforming iron ore. The AUD has gained 6% against the MXN since late January on the back of the global hunt for yield. The AUD would also suffer in the event of a Trump presidency, but has far less to gain than the MXN in the event that the opinion polls are accurate.
Where MXN currently looks cheap relative to the USD, when we compare that pair to oil prices, AUDUSD looks expensive relative to interest rate developments. AUDUSD is outperforming both iron ore, one of its key drivers, and, even more massively, the short-term interest rate differential.
The AUD is being supported by the low volatility environment, favouring the carry trade. The RBA cut rates as expected on 2 August, and one more cut this year remains a possibility (priced at 50% by year-end). However, the currency subsequently appreciated despite AUD rates reaching an all-time low (2y swap rate below 1.85%), making it vulnerable to the next blip in risk conditions.
