AUD/USD to test the 0.8000/50 area - Westpac

Sean Callow, Research Analyst at Westpac, explains that equities are the wild card but overall, the resumption of broad-based USD decline last week seems rather bearish for its near term prospects, providing a chance for AUD/USD to test the 0.8000/50 area.

Key Quotes

“AUD/USD has trended higher over the past week, rising about a cent overall to just above 0.79 to start the week. There was some volatility at times, with a brief dip to 0.7773 after the US CPI data and a run at 0.8000 on Friday which failed, but overall the Aussie was well supported.”

“The most obvious source of support though was simply the return of US dollar weakness. The greenback fell against all G10 currencies over the week, with the Japanese yen strongest and AUD only #9. The stabilisation of equity markets seemed to remove some safe haven demand for the US dollar. And of course 6 consecutive daily rises in the S&P 500 helped global risk sentiment and thus the Aussie.”

“Australia’s commodity price basket has also lent some support, with iron ore prices rallying into the lunar new year holidays. With mainland China markets closed until Thursday, we will not receive much short term guidance on this front.”

“In terms of Australian data, Q4 wages on Wed will be the focus this week. Consensus is for another very subdued 2.0%yr reading, very close to the 1.9% pace from Q3 2016 to Q2 2017, which was the lowest since at least the early 1960s. In his parliamentary testimony on Friday, RBA governor Lowe said wages growth needed to pick up to more like 3.5%yr in order for inflation to pick up to the 2.5% mid-point of the RBA target range. But the RBA also made clear last week that while it expected wages growth to improve, it didn’t expect this to happen quickly.”

“Markets price no real chance of the RBA raising its cash rate until at least August, rising to about 65-70% probability by year-end. Westpac continues to expect no change this year or in 2019.”

“The likelihood of little change in the RBA outlook and limited direction from commodity prices suggests that AUD/USD this week will be mostly driven by the broad USD trend. It is a comparatively light week for US data and commentary. The minutes from the Fed’s 30-31 January policy meeting are rather outdated though the semi-annual report is due Friday night (AEDT).”

“Equities are the wild card but overall, the resumption of broad-based US dollar decline last week seems rather bearish for its near term prospects, with an increased focus on the widening US budget deficit. If the greenback does continue to struggle, then AUD/USD should probe the 0.8000/50 area this week, but the Aussie might be less impressive on other crosses (see for example AUD/NZD hitting lows since August 2017).”

“Event risk: US Presidents Day holiday (Mon), RBA Feb meeting minutes, Germany SPD members vote on coalition proposal, Global Dairy auction (Tue), Eurozone Feb manufacturing surveys, UK Dec employment, FOMC Jan minutes (Wed), Germany Feb IFO business survey (Thu), New Zealand Q4 retail sales, Japan Jan CPI, Fed Monetary Policy Report, Canada Jan CPI (Fri).”