AUD/USD: Currency challenges transition, RBA to cut in H2 – Danske Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 25, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Kristoffer Kjær Lomholt, Analyst at Danske Bank, notes that the overall Australian economic data releases have been mixed over the past month.

    Key Quotes

    “While the labour market has improved for a long period, the latest reports have been more blurry. Also the ABS CAPEX-survey points to a further large fall in mining investments over the coming years, which further challenges the economy’s transition. Q4 15 GDP, however, clearly surprised to the upside at 3.0% y/y (consensus 2.5%) with positive revisions. Household and government spending in particular countered the drag from lower investments.

    Monetary policy. As expected, the Reserve Bank of Australia (RBA) kept the cash rate target unchanged at 2.00% at the March monetary policy meeting. Overall, the statement was almost a copy of the one released at the February meeting: the easing bias related to low inflation was re-iterated, comments on domestic growth remained upbeat and risks of external developments were re-highlighted. The most noteworthy part of the statement was (once again) the comment on the exchange rate, which “has been adjusting to the evolving economic outlook”.

    Risks. The AUD remains exposed to global risk sentiment, global growth worries and developments in China.

    The stabilisation in global risk appetite and the latest surge in iron ore prices have sent the cross markedly higher. The move, however, seems overdone according to our model estimates based on relative rates, risk sentiment and commodity prices. Also the ‘aussie’ appreciation significantly challenges the economy’s transition phase and we now expect a 25bp cash rate reduction in H2.

    Finally, we expect higher US rates to weigh on the cross going forward. In light of the latest move we revise our forecasts higher but maintain the same profile. We forecast AUD/USD at 0.74 in 1M (from 0.70), 0.73 in 3M (0.69), 0.71 in 6M (0.68) and 0.71 in 12M (0.68).”
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