From Barrons:
The Australian dollar will drift higher, according to Credit Suisse currency strategist Koon How Heng, who upgraded the Aussie to positive from neutral today.
Heng sees three reasons why the Aussie will go higher.
First, the Reserve Bank of Australia will continue to stick to a monetary policy geared towards inflation targets. As long as Australia’s inflation holds up, the RBA will keep its rates steady too, despite two cuts this year. Heng writes:
Both headline and underlying inflation should stabilize at current levels in H2 and the largest part of the downshift in inflation expectations is also likely over. In fact, Australia’s Q2 inflation data, while relatively weak, did not deteriorate further compared to Q1.
Last week, the outgoing RBA Governor Glenn Stevens warned of the limits to rate cuts and quantitative easing in his last public speech as the governor.
Second, stable and strong iron ore prices will give the Aussie a boost. Iron ore is Australia’s largest export. Iron ore prices have climbed from just $40 per metric ton at the start to the year to about $60 now.”This positive outlook for crude oil is generally supportive of the energy complex and consequently, positive for AUD/USD as well.”
Third, yield! Even after the two cuts, the RBA’s benchmark rate is still at 1.5%. The 10-year Australia government bond yield is at 1.89% now, so much more attractive than U.K’s 0.55% and Japan and Germany’s negative rates.
Here’s my three reasons why the Aussie won’t be going to 80 cents and above:
- the RBA is going to keep cutting as Aussie inflation stays stubbornly low. The major driver of this is weak wage growth which shows no signs of improving and the housing market which dominates the Australian inflation pulse. That we’ve got weak inflation through the wildest housing supply side expansion that anyone can remember tells you that as the boom fades prices will tumble. As well, Glenn Stevens has been bleating about limits to low rates for five years as he cut from 4.75% to 1.5%. Look at what the bank does not what it says;
- second, iron ore at $60 is already priced in the currency. Iron ore $40 and below is not and that is where it is going by year end. Oil is less important but the risks favour more downside there too;
- third, although the Fed is on hold, the yield uplift will keep compressing as terrible Australian domestic demand keeps driving down local interest rates.
Of course, if China stimulates again in the new year (which is a decent bet) then the Aussie will see more periodic rising pain trades next year but the trend will remain down.
Mr Koon How Heng is calling a top in my view.
