AUD: New order? - Rabobank

The past few days have brought conflicting signals for AUD/USD as first the AUD rallied on the back of what was assumed to be a subtlety more constructive tone from the RBA, then the currency was knocked by a disappointing Q3 GDP report, explains Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“GDP rose by 0.6% q/q, compared with 0.9% q/q the previous quarter.  The most worrying aspect of the growth data in Q3 was the paltry 0.1% q/q rise in household consumption.  The relationship in Australia between weak wage growth, slow consumption growth and soft inflation is a clear example of a dynamic which currently characterises many other G10 economies.   Arguably the RBA is more sensitive to the issues surrounding low wage growth than some other G10 central banks, suggesting that the central bank may maintain a reluctance to tighten policy for some months to come.  We retain the view that AUD/USD will edge lower towards the 0.73 area on a 12 mth view and continue to favour selling AUD/USD on rallies.” 

“Without a significant or sustained rise in wage inflation, the outlook for demand and consumption price inflation is likely to remain in check.  The RBA’s statement earlier this week that “the Bank's central forecast remains for inflation to pick up gradually as the economy strengthens”, holds true but the word ‘gradually’ is a key component of this message.”

“On the back of the overnight data release, market expectations of a RBA rate hike before the end of 2018 slipped, though they remain fairly firm.  Going forward optimism about the likelihood of a rate hike within the next 12 mth is likely to be closely aligned with domestic wage date.  The RBA can also be expected to keep a close eye on the Chinese economy.”

“One of the big market factors for 2018 is likely to be the impact on Chinese growth from a slower pace of credit creation.  For Australia specifically the impact of this on demand for steel is set to be particularly crucial.  This week’s rout in copper prices can be linked to concerns about the outlook for construction in China.  Last week’s release of soft Chinese manufacturing PMI data led to concerns of a slackening demand from the metal.  By contrast iron ore has rallied as Chinese curbs on production of steel to limit pollution underpin prices.  However, if less steel is produced over the winter months and if construction in China slows, demand for iron ore and coal could fall, though higher-grade cleaner ore is likely to retain a premium over less pure material.”  

“The next RBA policy meeting is scheduled for February 6.  Currently there would appear plenty of reason for the central bank to remain cautious and to maintain the view that it is in no rush to tighten policy.”