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Overview
Weaker commodity prices tend to be associated with a stronger US dollar and a weaker Australian dollar. Despite the increased weight to tech stocks in recent years, Asian equities still tend to be very sensitive to commodity prices. And so it goes, a weaker Aussie is associated with weaker Asian equities.
This only adds to the case for Australian investors in global equities, particularly those into Asia, to be currency unhedged.
Chart 6: Asian equities tend to follow the Aussie
Source: Bloomberg
One of the best barometers of risk-off in the market is the Australian dollar, Japanese yen exchange rate. This is due to the Australian dollar being one of the most cyclically sensitive currencies in the world (being commodity based) and the yen is seen as a safe-haven currency.
Given its exposure to exporters, a stronger yen is bad news for Japanese equities.
Chart 7: Aussie dollar v yen – risk-off barometer
Source: Bloomberg
For the month to date, cyclical sectors, led by energy and materials, are deep in the red relative to defensive sectors like staples and utilities.
The latest Bank of America fund manager survey found the cyclical boom has peaked. A ratio of cyclicals to defensives has fallen and is now flat year-to-date. As fears about peak economic growth and rising inflation dominate the narrative, that ratio has further to fall.
Chart 8: US Cyclicals sell-off v defensives
Source: Bloomberg
