An additional support for AUDUSD in the last few weeks has been the reduction of ‘carry’ available in some other ‘carry currencies’. In Brazil for example the government has increased measures to curb ‘excessive’ currency appreciation. In recent months Brazil raised the Tax on Foreign Exchange Transactions (IOF tax) to 6% on fixed income, 6% on offshore bond issuance and 2% for equities. Furthermore government intervention in the FX market to suppress the currency has restricted the supply of US dollars to the local market. Brazilian Onshore funding rates in USD exceeded 6% last week. The combination of these two factors briefly turned the implied forward rate for 1 month BRL (chart 1) negative.
Chart 1 – USDBRL 1 month NDF implied yield
Chart 2 tracks the premium of BRL implied 3 month yields over AUD implied 3 month yields, these were running fairly steadily at approx. 4% as domestic overnight rates in Brazil are 11.75%. According to Bloomberg during the month of April this premium has been squeezed from 4% to as low as -1%, significantly increasing the relative attractiveness of AUD as a carry trade.
Chart 2 – USDBRL implied 3 month yield minus AUDUSD implied 3 month yield
This dynamic is possibly an additional reason why AUD has continued to perform in the face of a stalling copper price (chart 3) which if recently observed trading patterns had continued would have suggested AUD trading at around parity over the course of the first quarter.
Chart 3 – AUDUSD vs LME 3 month Copper
