AUD/USD could still revisit the highs – RBC CM

Elsa Lignos, Research Analyst at RBC Capital Markets, notes that the AUD is the second-best performing currency in H2 so far, just behind NOK.

Key Quotes

“Since last month, the AU-US 2yr swap has stabilized (AU 2yr swaps are up ~10-11bps, outperforming US 2yr swaps which are up just 2bps) though OIS markets are still priced for a 50/50 chance of a cut by Q1. But as we argued last month, that matters less as AUD has seemingly decoupled from rate dynamics. This is not specific to AUD – we are seeing the same thing in NZD for example. But it reinforces our view that AUD/USD could still revisit the highs.

Lowe’s first meeting as Governor ended with an unchanged rate decision as expected, though the tone was a little more downbeat – both on the external front (“growth in global industrial production and trade remains subdued”; “the underlying pace of growth in China has been moderating”) and the domestic (“household consumption has been growing at a reasonable pace, but appears to have slowed a little recently”). Our AU economists have been forecasting below trend household consumption for some time, on the back of tepid wage growth, high levels of household debt and a patchy labour market. But firming commodity prices and concerns over financial stability are likely to keep the RBA on the sidelines for now. That leaves AU as the second highest-yielder in G10 (cash rate at 1.50%), supported by the G10 carry trade.

Technically, AUD/USD has been threatening to break the very long-term falling trendline dating back to early 2013. Its attempts in late September/early October have so far not held up, but we still look for a break higher. That trendline comes in around 0.7650 right now, with resistance at 0.7756 and 0.7835 and support at 0.7442 and 0.7145.

6-12 Month Outlook – Underperformer

Longer-term, the balance of risks remains to the downside, but ongoing demand for yield should limit this to fluctuations within the recent range. The need for fiscal consolidation over the longer-term is consistent with our AU rates strategists’ view that the RBA will need to do more of the work in supporting growth (we look for another rate cut in 2017 taking the cash rate down to a historic low of 1.25%). In real trade-weighted terms, AUD is still some 10% above its long-term average and the impact of previous weakness on economic activity has been limited. Our long-term forecasts are unchanged this month.”