The Australian dollar fell again last night despite a general bid for risk as DXY lifted. Yields were a little lower which helped with stocks. Wall Street is still bullish for more Australian dollar. Citi is typical:
–We expect the 17 March FOMC to be slightly hawkish, with the median dot rising to one hike but Chair Powell mostly downplaying prospects for withdrawing easing anytime soon in the press conference.
–We expect no changes to policy and no material changes to policy communications in the Statement, and the risks to our base case skew dovish. A dovish surprise would be if the median 2023 dot remained unchanged at zero hikes. A hawkish surprise would be opening the door more overtly to signalling the beginning of tapering this year or the 2023 median dot suggesting two hikes.
–Into the FOMC, higher US yields could push USD higher, too, as markets increasinglyprice a more hawkish Fed too. Our medium-term views remain for further upside in riskassets linked to global recovery, which overtime should weigh on the USD.
It also sees a weak EUR:
–In line with our expectation,the March ECB meeting was slightly dovish, highlighting the intent to “significantly increase” the pace of purchases in their policy decision over the next quarter. We think in short-term, that dovishness is mostly in the price, even though for now the central bank equation has ceased to be a driver of EURUSD upside.
–US-EU 5/10y real yield spreads slightly widened last week (up 2/5bp WoW, though 2ydropped12bp on the back of a dovish ECB). Although we don’t see a true divergence in central bank policies as the ECB news are modest and the Fed is not announcing tapering any time soon, we do see the scope for further widening in real yield spreads with i) the differentiated attitude towards rising rates between the Fed and the ECB, and ii) a significantly better growth outlook in the US than in the Europe. But Eurozone rates are clearly lagging the DM uptrend.
–EUR is the main alternative funding currency in an environment where the USexceptionalism narrative may still gain traction.
This is clearly a scenario in which the Australian dollar will struggle. In trend terms, it nearly always tracks the EUR:
AUD and EUR joined at the hip
Yet Citi remains bullish AUD:
AUD and NZD outperformance should resume with improving risk asset performance including equities and commodities. Australia February labor data on Thursday should continue to point to a steady economic recovery (Employment Change: Bloomberg +35k, prior+29.1k; Unemployment Rate: Bloomberg 6.3%, prior 6.4%). However, ahead of this, AUD has underperformed in G10, trading-0.35% to 0.7740, while NZD has notched a 0.2% gain to0.7190 despite little of note locally.
It doesn’t make much sense to me. If it walks like a falling EUR and quacks like one then it is a falling AUD.
