BoaML reckons China will save the Australian dollar:
- While AUD’s sensitivity to global risk has diminished, China-specific risk still matters despite recent decoupling.
- AUD could benefit if China’s import impulse strengthens; watch high frequency shipment and steel data for early signs .
- From an economic perspective, the focus on slowing domestic demand potentially overlooks a sizeable external impulse from China easing policy and the weak/undervalued level of the AUD.
- … a likely recovery in Chinese growth later this year keeps us comfortable with projecting medium-term AUD appreciation.
It’s not beyond the realms of possibility but there are a number of important caveats:
- The terms of trade have already boomed yet done nothing to prevent the domestic stall.
- This is because all three channels of the traditional income distribution channels for commodity revenue are all impaired. Stocks are heavily foreign owned. The Budget is striving for surplus. And there is no need for any investment given capacity gluts so wages do not benefit at all, made worse by rampant mass immigration.
- Moreover, owing to the Vale accident, commodity prices and the terms of trade will more likely fall from here regardless of any Chinese “recovery”. They are already at the last Chinese stimulus highs, after all.
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That is not to say that the external boom will not benefit the economy and help support the AUD. It will. Most particularly via fiscal spending that would not otherwise be affordable. There will be tax cuts and, I suspect once Labor is in, direct fiscal stimulus as well. With rate cuts this could establish a firmer base for growth in 2020.
But given the array of headwinds now and the need for said monetary and fiscal easing, I can only see the external boom slowing further falls in the AUD, not preventing them, let alone lifting it.
