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Aussie remains under pressure on higher global yields

Despite the AUD relief rally post Fed's Brainard dovish remarks earlier on Monday, the Australian Dollar is once again under pressure in the Asian session, with spec flows re-engaging in what has become one of the favourite currencies to stay away from since the onset of the bond rout last Friday.

Why the Aussie has been so resilient?

The Australian Dollar, amid an ultra-low yielding environment, has been perceived, together with the Kiwi, as an attractive alternative for investors seeking decent returns. Steady commodity prices (read Oil, copper, gold), solid performance in emerging markets as high yields chased, together with a temporary ease of concerns in China (at least the country's economy has not been making gloomy headlines in mainstream media as of late), has allowed the antipodean currency to trade very resilient. Throw into the mix a non-commital RBA, which while leaving all monetary policy options available, is not expected to easy further any time soon, and the Australian Dollar has found itself in a rather comforting environment during most of 2016.

Aussie's fortune undermined by global yields' rise

However, the risk that may revolt the calming waters in the Aussie outlook might be a world of higher bond yields as that widens the scope of appealing investment opportunities around the world, which as a result, leads to a withdrawal of capital in emerging markets (tempotary shelter found on ultra-low/negative yields) and a reinvestment into rising yield countries, perceived as safer by rating agency standards. What this means is that currencies the likes of the Aussie or the Kiwi, tightly linked to EM performance and its appeal on higher yield, get underminded as 'yield chasing' habits change.

Last Friday's spike in global yields was a major event causing investors to perceive a potential structural change in market dynamics, with higher yields globally (if the sell-off in bonds were to show substance behind) a communication that market participants may no longer be counting on Central Bank's QE programs or other forms of ease as frequently, wth monetary policy tools exhausting, which should result in a more proactive fiscal-led approach to stimulate economic growth and inflation.

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