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AUD: Keeping a close eye on China – Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 22, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the commodity currencies have reacted well to the news that Chinese leaders have approved an economic blueprint for next year.

    Key Quotes

    “Although there will be no details of the plan and no growth target until March, the sketch that has been drawn by officials indicates that monetary policy must be more “flexible” and that fiscal policy settings need to be more “forceful”.”

    “Since early 2013, the value of AUD/CNY has dropped by almost 30%. The sharp fall in the value of the AUD has helped cushion the Australian economy against the multi-year lows registered in iron ore and coal prices this year. However, today’s statement from China that monetary policy needs to be more ‘flexible’ may mean more than lower interest rates from the PBoC.”

    “Earlier this month the Chinese Central bank published a statement suggesting that there needs to be greater focus on China’s effective exchange rate rather than the CNY/USD reference rate. Although the CNY has fallen vs. the USD this year, China’s effective exchange rate has risen. On the back of weak inflation and slowing growth it is possible that the BoC will weaken its de-facto USD peg next year to allow it effective exchange rate to fall. This could imply heightened risk of a move higher in AUD/CNY, unless the RBA takes evasive action.”

    “A Bloomberg survey published last week suggests that only 12 of 23 economist expect the RBA to cut interest rates in H1 2016. The sharp falls accumulated in AUD/USD in recent years, the continued impact of two rate cuts announced over the past 12 mths and the resilience in the unemployment rate are frequented cited as factors which may allow the RBA to keep rates at 2% in the coming months. While the unemployment rate has trended lower this year, wage inflation has been unable to gather much traction rising a moderate 0.6% q/q in Q3 and 2.3% y/y.”

    “The decline in wage growth in the past few years may be a related to the loss of highly paid mining jobs or lower terms of trade but it still hints at the need for the real exchange rate to adjust in order to improve competitiveness. If China allows its effective exchange rate to fall, we would argue that the risk of further easing from the RBA is also heightened. We are expecting the RBA to cut rates again in the coming months and for the AUD to slip vs. the USD towards 0.68 on a 6 month view.”
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