AUD: Headed towards 0.75 or 0.85? - Westpac
The RBA minutes from the July 4 meeting released earlier this week added to the ferocious rally that lifted the A$ by a whopping 3% in the last 5 days, notes Robert Rennie, Research Analyst at Westpac.
Key Quotes
“Hard as it is to imagine for us, the A$ is now the best performing G10 currency in 2017.”
“This move was not in our game plan. We saw a ‘sticky’ A$, but one that was very much capped by 0.78 (at a real stretch 0.80) and destined for lower levels later this year as the Fed raised rates/ tapered; as China slowed post the NPC and as commodity prices weakened into 2018.”
“To be fair, we had felt that it was probably in 2018 that these factors showed through, but the size of the move has certainly caught us by surprise. So what is the chance we see 0.85 for the A$ as domestic financial press suggested here on Tuesday?”
“The A$ is at the top of our fair value band. For no change in the inputs, the A$ would be more expensive than it has ever been over the last 10yrs of weekly data were it to hit 0.85.”
“Despite the more confident stance in the minutes and the decision to set out the new so-called “neutral target”, Bill Evans’ forecasts remain consistent with the cash rate staying on hold throughout 2017 and 2018.”
“Thus we would require a further significant appreciation in commodity prices for us to be happy that an aggressive push into the mid 0.80s is possible. Now we have long argued that the siren calls of ‘the mid $40s’ for iron ore were way out of line with rebar at 5yr highs and hot rolled close to 4yr highs in China. However, that story is maturing in our view.”
“The A$ is up 4.7% from the lows seen July 4 – the risks of a shift in guidance on the A$ from the RBA at the August 1 meeting appear high. To be sure, the USD should continue to trek lower if the US inflation continues to undershoot as we expect.”
“However, we stick with our core view– the A$ is destined for lower levels later in the year. For us, that means 0.75 not 0.85 before year end.”