AUD/USD weakness may increasingly require the US leg – Deutsche Bank

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

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Adam Boyton, Chief Economist at Deutsche Bank, suggests that largely in response to equity market weakness and associated global risks, markets have moved to price a little over a full (25bp) easing from the RBA this year.

    Key Quotes

    “Given the tendency of the RBA to respond to global risks, such market pricing is not surprising. And with this week seeing the release of the Q4-2015 CPI, and inflation globally having undershot expectations recently, market pricing for the RBA might extend a little further. (Indeed our forecasts for core and headline inflation are a little below the consensus expectation.)

    Ultimately, our expectation of a broadly stable unemployment rate over 2016, with some prospect of a modest decline further down the track, should see the RBA cash rate end 2016 at its current level of 2.00%.

    Turning to the AUD, bigger picture trends in AUD/USD remain heavily influenced by interest rate differentials. With long end bond spreads between Australia and the US still a function of short end spreads, our views on the Australian domestic economy and RBA policy settings suggest limited scope for AUD downside.

    If anything, we suspect we are now a little more optimistic on the Australian economy than the market. Of course that doesn’t mean AUD/USD can’t trend lower – it just means that from a rates perspective we need spread compression to come via the US side of the equation.

    Another source of potential AUD/USD weakness can, of course, come from the USD itself. With DB currently expecting the Fed to tighten more than the market has priced; and my colleagues arguing in our recent FX Blueprint in favour of ongoing strength in the USD, American influences point to a lower AUD/USD. That said, should our US views prove too optimistic – especially in light of some recent softness in various leading indicators of activity – it is likely that we may end up too pessimistic on the AUD given the signs of stabilization in the local economy.”
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