• AUD/EUR At 11-Week High
• Capital Inflows Maintain Strength
• Top Forex Broker Forecasts Further Gains 

The Australian dollar hit 11-week highs against the euro today, receiving a marked boost from the risk-on sentiment prevailing in markets.

Positive price action on commodities charts and the news that Germany’s central bank plans to start buying local bonds in the coming months, has lifted investor sentiment surrounding the riskier, commodity-linked currency. Identifying further boosts to the Aussie from China, Mitul Kotecha, head of foreign exchange strategy at Credit Agricole, said: “AUD’s outperformance continues unabated and the currency is set to make further strides in the days ahead.

“While AUD remains a relatively high beta currency, it is also a China play. In this respect it has benefited from expectations of more stimulus measures from China. Separately my risk barometer remains in ‘risk neutral’ territory, conducive for risk currencies.”

Germany Eyes Aussie Assets

Helping the Aussie make its way up currency charts was the news that Germany’s Bundesbank is due to start adding AUD assets to its foreign reserve holdings. The addition of assets such as Australian government bonds are expected to hit German reserves by the end of September, with teams of traders already in place at Bundesbank to begin trading Australian-dollar denominated assets.

The move follows a two and a half year review and will see the German central bank join around 60 other central banks currently allocating reserves into Australia assets. The asset-buying action of banks around the world has served to support the AUD amid times of global economic slowdown, critical warnings from the IMF and slumping commodity prices.

According to a number of Australian strategists, the effect of all this capital inflow has been to push the AUD artificially higher than where it should be given commodity prices and other fundamental factors. Andrew Salter, senior currency strategist at Australia and New Zealand Banking Group Ltd., said: "We have commodities off, mining stocks down and a generally gloomy macroeconomic backdrop. Capital flows are becoming increasingly important."

“Likely To Grind Higher” Says Top Forex Broker

Last week’s disappointing Aussie data should also have served to hurt the currency more than the short-term dip we saw, but the AUD bulls remained undeterred. Data from the Australian Bureau of Statistics showed that the economy lost 27,000 jobs in June after adding 38,900 jobs in May. The figures came as a shock to economists and leading forex brokers who had expected the number of jobs to remain flat. But, as Kotecha identifies, prevailing market winds are aiding the AUD in otherwise adverse conditions.

“While weak Aussie jobs data last week may have instigated a degree of caution into AUD bulls the currency is likely to continue to grind higher in the absence of a bout of rising risk aversion”, the Credit Agricole strategist said. “Q2 inflation data next week will provide further direction but to be frank the market is already pricing in around 75bps of further policy rate cuts this year, and a benign inflation reading will do little to change this. The key resistance level on the top side for AUD/USD is 1.0475.”

At the time of writing, the AUD/USD was up 0.38 percent at 1.0398.

Sarah Cox, Markets Writer. ForexSpace.com