AUD: Modest gains ahead – SocGen

According to Alvin T. Tan, Research Analyst at Societe Generale, AUD’s bottoming process is behind us and AUD/USD should continue to turn higher with the USD downtrend and robust Australian growth momentum.

Key Quotes

“There is however no strong economic tailwind in Australia as domestic private investment remains weak and household consumption has been largely driven by drawing down savings.”

Hesitant RBA. The trade-weighted Aussie dollar has risen by roughly 12% since the low in early 2016, and the RBA is not keen to encourage too rapid an appreciation of the currency. More importantly, the lack of inflationary pressures allows the RBA to be patient. Despite the apparent tightening of the labour market, wage gains have continued to be unexpectedly sluggish. On the flipside, the RBA is becoming increasingly concerned about rising house prices and burgeoning household debt. We consequently expect the RBA to stand pat on policy through 1H18.”

China slowdown. The expected loss of Chinese growth momentum into 2018 and beyond from additional tightening by the Chinese authorities should help restrain Aussie gains. Apart from the direct trade dependence on China, a weaker Chinese economy would also exert a negative impact through lower industrial commodity prices that have an indirect impact on the Aussie exchange rate.”

Modest gains expected. The RBA’s hesitancy and the expected Chinese slowdown should act as drags to restrain the Aussie rally in the coming quarters. As such, we expect EUR/AUD to track sideways in the coming quarters, and the gains in the Aussie will come through primarily against the US and NZ dollars.”

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