AUD reacts to a jump in rate cut speculation - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that if Trump puts up barriers to Chinese imports, the impact on a country such as Australia through its links with China could be far reaching.   

Key Quotes

“Whether or not Trump’s team takes the decision to label China a currency manipulator is being considered by some as likely the tone for his position going forward.  The PBoC, of course has been working to prevent too much depreciation in the CNY.  In October, Chinese FX reserves declined for a fourth straight month to their lowest levels since March 2011.  This factor combined with the current broad-based surge in the value of the greenback has likely contributed to a sharp fall in the value of the CNY vs. the USD since the November 8 Presidential election.  It is our view that there is significant risk that the Chinese authorities will allow the value to the CNY to fall potentially sharply over the course of the next year if the growth outlook is threatened.”   

“Measured since the end of last year, both the AUD and the NZD have been trending higher vs. the CNY.  This trend is a contributing factor behind the low levels of inflation being experienced in both counties.  This month the RBNZ cut interest rates by 25 bps and the policy committee remarked that “the exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed”.  Although RBA Governor Lowe has taken a more pragmatic approach to low inflation, the potential risks stemming from a Trump Presidency combined with the drop in Australian wage growth to an all-time low suggest that the RBA could still ease again.  Although we see some potential for the recent broad-based rise in the USD to correct, we have lowered our 12 mth forecasts for AUD/USD and NZD/USD to 0.72 and 0.69 respectively.”