AUD/USD - a rollarcoaster ride - Rabobank

Rabobank Financial Markets Research team notes that AUD/USD has had a rollercoaster ride this month dipping as low as 0.7491 on March 9 and recovering towards the 0.7720 level after the Fed interest rate decision this week. This bounce can be explained by the drop in the USD that followed the Fed’s policy statement

Key quotes

"The US appears to have entered a goldilocks phase in which a decent pace of growth is being complimented with low inflationary pressures. The slow pace of tightening from the Fed is reassuring for risk appetite.  This is turn is supportive for demand for higher yielding and commodities currencies such as the AUD.  The high-yield sector has had the benefit of encouraging economic data since the start of the year from the US in addition to China, Japan, and Europe.   Another piece of good news stems from indications that the US Administration may be toning down Trump’s bellicose attitude towards the trade that was characteristic of his election campaign."

"The RBA’s March policy statement warns that “the composition of growth and the rapid increase in borrowing mean that medium-term risks to Chinese growth remain”. Since China is the world’s largest consumer of commodities and Australia’s largest trading partner, the outlook for the AUD remains particularly tied to that of the Chinese economy."

"Domestic Australian data is mixed. This week’s release of the February trade data brought a disappointing -6.4K drop in employment.  Generally, employment trends are varied across the economy with many new jobs in recent months being only part-time.  As in many developed economies, wage inflation is low – having registered a record low in Q3 2016 at 1.9% q/q.  This translates into low growth in household income and sluggish increases in demand led inflation.  That said, low-interest rates continue to support house price inflation and this has recently given way to increased speculation that the RBA could hike interest rates before the end of the year.  Potentially as a reaction to this talk, the RBA has indicated that it is willing to increase macro-prudential measures to tighten mortgage borrowing. This should undermine talk of a 2017 rate hike and serve to keep the tone of the AUD vs. the USD soft."

"We expect the RBA to remain reluctant to tighten policy given concerns that Chinese growth could slow on any attempt to slow credit growth and in the absence of an official step down from the US Administration regarding its protectionist stance. We are forecasting a move in AUD/USD towards the AUD/USD0.73 area by year-end.  That said, clarification of the US’s intentions on trade policies provides risk to this view.  "