FX comment – Fade the AUD as the RBA shifts to easing bias

by: Roy Teo

  • AUD supported after the RBA left monetary policy unchanged
  • Further rate cuts expected
  • AUD to decline to 0.62 in 2016

 

AUD supported after the RBA left monetary policy unchanged

The Australian dollar (AUD) spiked higher by about 30 pips to around 0.72 after the Reserve Bank of Australia (RBA) left the Official Cash Rate (OCR) unchanged at 2.50% this morning. This is because financial markets were pricing in about 40% probability that the OCR will be lowered by 25bp today. However positive sentiment in the AUD was capped as the RBA stated that the outlook for inflation may afford scope for further easing of policy. Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected. Risks arising from the housing market are likely to be contained with moderating dwelling prices and supervisory measures implemented. With regards to the exchange rate, the RBA did not increase their dovish tone, maintaining their view that the AUD is adjusting to the significant declines in key commodity prices.

 

Further rate cuts expected

Since the last monetary policy meeting on 6 October, iron ore prices, Australia’s key commodity export has declined by about 7% to below USD 50 per tonne, while the AUD has remained largely unchanged against both the US dollar and against its trade weighted basket of currencies. This divergence is likely to result in the RBA increasing its dovish tone on the exchange rate. In addition, housing auction clearing rates have declined by almost 10% since early October. This implies that house price inflation is likely to slow further. The latter and soft labour market are expected to weigh on non-tradable inflation in the coming months. Indeed, the recovery in the job market since the beginning of this year seems to be faltering. The steady unemployment rate has masked the true outlook of the labour market, supported by a rise in part time jobs. On the other hand, the number of full time job gains has slowed from 46.7k in the first quarter to just 10.1k in the third quarter, the slowest pace of growth in the past one year. Furthermore it remains highly uncertain if the recovery in consumer confidence in October (still 5% below levels when the RBA last cut the OCR in May this year) due to optimism from Prime Minister Turnbull taking over leadership is sustainable. We stick to our view that the RBA will further ease monetary policy as soon as December this year. This is not fully priced in by financial markets. We expect the RBA to lower their economic growth and inflation projections in the next quarterly update on 6 November.

 

 

AUD to decline to 0.62 in 2016

In the short term, we expect any relief recovery in the AUD above 0.72 to be unsustainable ahead of tomorrow’s trade balance data release. Further resistance around 0.7440-0.7500 is also expected to curb any positive catalyst in the AUD. Looking ahead, we expect the AUD/USD to decline to 0.70 and 0.62 by the end of 2015 and 2016 respectively due to divergence in economic and monetary outlook between Australia and the US.