AUD: Not convinced? - Rabobank

AUD/USD attempted to move higher on the fairly upbeat sentiments expressed by the RBA after today’s policy meeting, but the gains were short-lived, notes Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“Despite the reassurances of the central bank it appears that the AUD does not currently have the gumption to fight either broad-based USD strength or fears that the domestic economy could be exposed to cold headwinds blowing in from China.”

“Within the G10 basket, the AUD is usually most sensitive to sentiment in emerging markets. This can be explained by its strong trade links with China and commodity based exports.  Australia’s current deficit is also a factor in ensuring that the AUD is potentially more reactive to negative market sentiment than many of its peers.”

“In the year to date, the AUD is the second worse performing G10 currency after the SEK, dropping around 10.5% vs. the USD.  This is despite the fact the AUD started the year off on a positive note based on misplaced market optimism that the RBA could raise interest rates this year.”

“At its regular policy meeting today the RBA left interest rates on hold for the 25th consecutive month.”

“Not only does the current correction in domestic house prices threaten to weigh on confidence, but the slowdown in Australia’s housing market has exposed the risks associated with high household debt levels.”

“In the coming months we expect the tone of the RBA to become clearly more cautious. Not only should interest rate differentials continue to weigh on AUD/USD, but fears of slower growth in China are likely to become elevated as the impact of trade wars bites.”

“The AUD could also be sensitive to any signs that the correction in house prices is deepening. We maintain our bearish view on AUD/USD and expect a move towards 0.70 on a 9-12 month view.”