Nothing we don’t know but a decent formulation of current AUD dynamics by Credit Suisse.
An indecisive RBA policy stance has been a key driver of AUDUSD ending Q2 unchanged near our 0.6600 Q2 target, even amid generally supportive growth numbers and even a surprise decision to resume rate hikes. The deceleration in headline and core CPI data in May should further fuel market’s doubts about the RBA’s commitment to a lengthy hiking cycle, beyond the ~33bp increase currently priced in by year-end.
In absence of a structural change in RBA approach, fading AUDUSD spikes should remain appropriate. Personnel changes will be of interest on this front, as Gov Lowe’s term ends in Sep and leadership change news is expected in Jul. Current front runner Deputy Governor Bullock getting the job would in our view not represent a major change. Lack of gov’t endorsement of rate hikes also remains problematic for AUD.
Setting aside the rates outlook, the fundamental appeal of AUD has not changed much in Q2. The current account balance remains in surplus, even with the post-Ukraine boom in energy export receipts cooling off further. Hopes of a meaningful rebound in Chinese demand are never far away, but have yet to be reflected in Australian economic activity data or in the prices of industrial metals.
The rangebound price action in Q2 has translated into further consolidation in implied AUDUSD vols, in line with trends seen elsewhere in FX. This might make AUD marginally more vulnerable to risk off developments than it was at the end of Q1. Still, AUDUSD calls are still priced at a discount to puts.
My view is that the AUD outlook remains negative.
