AUD: Flying high - TDS

AUDUSD has finally broken out of its ~ 6 cent range that has persisted for the better part of the last two years as the catalyst stems on the belief that the RBA will follow its peers to a more hawkish footing following a discussion of the neutral rate contained in the July Minutes, explains the research team at TDS.

Key Quotes

“We do not think the RBA is in a hurry to hike however, but we think it is fair to assume that this discussion is more consistent with a bank thinking about higher rates on the horizon.”

“The RBA’s June Minutes revealed a discussion about the impact of monetary policy decisions on financial stability. This, we think, could be a hint that if recent macroprudential measures are not enough to curb Australia’s overheated housing market, the RBA may be warming up to using the policy lever instead. The BoC went through a similar process. We believe recent APRA measures are too little, too late and seem poorly targeted.”

“The critical swing factor will be the labor market—wage growth in particular. Job creation has been encouraging lately and titled towards FTE. Hours worked in this category have also improved and if wages follow, this will be an important determinant that informs the RBA’s tone going forward. Indeed, we think wages have bottomed but may not be enough data to convince the RBA to pull the trigger this year. The next two releases come in August and November.”

“The front-end of the curve has, for some time, priced in very little in the form of policy tightening. We think this imposes an asymmetric risk profile for the AUD heading into year-end. AUD inflows remain robust—including those from Japanese accounts. This suggests AUD retains a supportive tailwind.” 

“Our strategically bearish USD view suggests that the path of least resistance is higher for AUD, at least in the medium term. However, we think the RBA may become more uncomfortable with current levels of the currency. The upcoming speech by Deputy Governor Debelle could take on a more measured tone. Additionally, positioning appears to be stretched on AUD longs, particularly within the leveraged community. Technically, the RSI is in overbought territory.”

“This creates a notable snapback risk in the near term. We view 0.7800/35 as key support, followed by 0.7750 and 0.7530. Given extended positioning, a move towards the latter would make a compelling entry point to consider longs with an eye towards 0.81/0.82 area.”