AUD: Ready to dodge the cross-fire? - Rabobank

The AUD has taken some comfort from the releases of better than expected Chinese economic data overnight as figures referring to factory output and investment in fixed assets both beat consensus forecasts in the first two months of this year, explains Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“On any trade war between the US and China, the AUD would undoubtedly be caught in the cross-fire.”

“In recent years our AUD/USD forecasts has tended to be on the bearish side of the market consensus. This has meant that while we were wrong with respect to 2017’s mid-year rally, our end of year forecast produced at the September high accurately recorded a forecast of 0.78 (according to data captured on Bloomberg’s FXFC).  This year our forecasts for the AUD remain on the bearish side of market forecasts due to the threat that Chinese growth could slow and on the (related) assumption that the RBA will remain cautious on policy.”

“At the start of this year there was a flurry of excitement in the market that 2018 will bring a reduction of monetary policy accommodation from a variety of G10 central banks. Last year brought rate hikes not just from the Fed by from the BoC and the BoE.  Additionally towards the end of the year the ECB and the Riksbank made announcements regarding the reduction of QE and the Norges Bank warned of a 2018 rate hike.  By January the market was speculating that the RBA could also reduce policy accommodation this year.  This is a view that the RBA has since subsequently and successfully pushed against.  The RBA remain suitably cautious and the AUD has retreated from its January highs.”

“Looking forward we see no imminent change in this policy outlook. At last week’s meeting the RBA predicted that the Australian economy would grow faster in 2018 than it did in 2017.  However, it warned that “one continuing source of uncertainty is the outlook for household consumption.  Household incomes are growing slowly and debt levels are high,”.  Of particular concern for the RBA is that “notwithstanding the improving labour market, wage growth remains low”.  This is an issue experienced with most of the rest of the G10, though wage inflation in Australia stands only slightly above record lows.  Although there is optimism at the RBA that inflation will trend higher, policymaker judge that “this progress is likely to be gradual”.  It remains our view that the RBA will stand pat on policy this year and the risks associated with trade wars reinforce this view.”

“The USD has performed well against a broad basket of currencies since the start of last month. This is partly related to interest rate differentials but also due to the blow dealt to risk appetite from fears that trade wars could slow global growth.  Our 12 mth forecast for AUD/USD stands at 0.75.  This is below the Bloomberg median of 0.80.”