Via Westpac today:
AU-US yield differentials have continued to grind steadily in the US dollar’s favour in recent weeks, but the 10 year spread widening in early October was eye-catching, from around -32bp to -50bp. This looked to be a key driver of fresh AUD/USD lows since Feb 2016, near 0.70. Growing concern over the impact on China’s economy of US antagonism also seems to be weighing on AUD, while local politics remains a concern into the 20 Oct by-election. This implies short term risks towards 0.69. But Australia’s key commodity prices are substantially higher than early 2016, so trade sub-0.70 might be fairly short-lived. Commodity prices support our year-end forecast of 0.72.
Commodity prices do but nothing else does:
- China to slow through year end and commodity prices have already priced stimulus;
- US tariffs ratchet up to 25% in January;
- Election season to stop Australian growth in its tracks before May 2019;
- housing bust to intensify with pressure on RBA to cut;
- European elections in May 2019.
Commodity prices should prevent a free fall in the AUD but that’s about as positive as I can get.
