The Aussie dollar’s run higher against the USD has surprised many, but like almost all factors that shape the direction of the local currency, the macro effect is mainly external. The slumping Trump presidency has a direct correlation with the US Dollar Index, and combined with a less than favourable (sic) inflationary outlook from the Fed, has taken the floor out from under USD:
While locally the RBA has not changed its easing bias, the upcoming GDP print components – namely capex and construction work done – may provide a further impetus for the Aussie to rally on what has been forecast as high expectations.
ANZ have a recent note out on their view and on how to play it, via Forexlive:
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GDP forecasts for Q2 have already been tweaked higher and upside surprises in this week’s partials – construction work done and capex would firm these expectations and add further support to the AUD on crosses.
But growth alone is not enough to trigger a shift in the RBA bias, just yet. So, we would use this opportunity to sell the rallies.
The run-up to 0.8000 looks stretched. Continued uncertainty about the USD may hold the AUD up, however
We see rates on hold at 1.5%. Recent data suggests the risks to the upside are rising.
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They get a bit meta with analysing the RBA minutes, but its an interesting take:
From this we have constructed a measure of the RBA’s bias – our RBA Bias Index. This index provides a clear signal about the likely change in the cash rate over the coming 6-12 months (Figure 3). It also leads changes in market pricing of the RBA cash rate.
The most recent post-meeting statements have taken the RBA Bias Index a little above one.
This indicates the RBA’s policy bias is starting to lean in a slightly hawkish direction.
We don’t think the signal is yet strong enough to shift our view from ‘on hold’, but the evolution of the RBA’s language clearly bears watching.
So if the RBA jumps on the central bank bandwagon to normalise rates – a wagon that might be circling back around again if the noises from Jackson Hole over the weekend have any weight – this could push Aussie well past its middle ground at the 82-84 zone and take it up to 87 cents. This corresponds with previous support, now long term resistance:
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That’s a lot of risk to take on selling into rallies, but the upside target of 87 cents is to put it mildly, delirious. Drilling down to the weekly view, we can see that 82 cents is a much more likely resistance level that won’t be beaten:
That level corresponds to the two year plus resistance level and would require a big boost to already overstretched commodity prices, plus at least one rate hike from the RBA. It must be remembered that the current move above the 77 cents level – which corresponds to the highest forecast of any major research house for the Aussie for all of 2018 – is mainly on the back of a weaker US dollar.
That’s why watching the breakdown of the Trump administration bears watching, and ANZ is indeed right to call for selling into any rally that economists confuse a new trend for what is just volatility.
