AUD/USD dependent on commodities and interest rates - Rabobank

In view of Jane Foley, Senior FX Strategist at Rabobank, it is clear that the most recent moves on AUD/USD have been heavily bias by the general tone of the greenback as the USD has found some renewed support in recent sessions having been under pressure since early December. 

Key Quotes

“Measured on a 1 mth view the AUD can claim to be the second best performing G10 currency after the NZD.  This has been a function of a December surge in expectations regarding the chances of an RBA rate hike in 2018 and a recovery in the price of Australia’s key exports of coal and iron ore.”

“There is currently a confusing array of forecasts in the market about the prospects for iron ore this year.”

“While not all commodity forecasters are in agreement with the Australian government, slowing Chinese demand for iron ore and coking coal and a softening in the price for the commodities would clearly not be supportive factors for the AUD.  That said, the Australian government is more optimistic about growth in liquefied natural gas (LNG) forecasting that it will add AYD14 bln to Australia export earnings between 2016/17 and 2018/19 while iron ore could subtract AUD10 bln.”  

“The risk of reduced Chinese demand for Australia’s bulk exports is likely to strike a note of caution at the RBA.  That said, the domestic economy and in particular the labour market has been showing stronger signs.” 

“The strength of the November Labour report has not changed the fact that last year, Australian wage growth hit its lowest levels on record.  The slow growth in household incomes and high levels of debt remain a considerable cause for concern for the RBA.  This suggests that there is no pressing need for interest rates to change.  That said, last month the RBA did conclude that “over the prior year or so, the unemployment rate had fallen and inflation had moved closer to target”.  It also stated that “recent data had increased confidence that there would be further progress on these fronts over the following year.”  Although the central bank is data dependent, the market is more confident of a rate rise from the RBA this year, with August being cited more frequently as a potential date for a move.  The growth in the market implied probability of a move was instrumental in leading the value of the AUD higher during December.  If AUD/USD is to progress further, the next round of domestic economic data releases will have to be sound.  Forthcoming release include retail sales consumer confidence and the December labour market report due on January 18.”  

“In recognition of the improvement in domestic economic data and the market’s expectations regarding rate hike rises, we have revised up our forecasts for AUD/USD.  However, with wage inflation low and given the potential for slowing Chinese demand for bulk commodities, we retain a relatively cautious medium-term view on the AUD vs. the USD.  While we see scope for a fairly flat range for AUD/USD through the coming 6 to 8 mth, we continue to see scope for a softer AUD/USD into year end.  Our 12 mth forecast stands at 0.75.”