Cross-currents to keep AUD stable

The AUD has been relatively stable versus the USD and on a trade weighted basis in June, ending the quarter close to the forecast of 0.77. There have been various cross-currents including mixed domestic data (weak investment intentions but strong employment growth), the RBA avoiding explicit forward guidance but continuing to suggest it has a soft easing bias, and stable commodity prices.

Given these cross-currents, the trigger for a near-term drop in the AUD is less apparent, especially if China data over the next month stabilises. Medium-term, AUD is expected to weaken due to policy divergence with the US, weak commodity export prices and a decline in capital inflows to the resource sector. 

Taking stock of the year to date, consistent sources of growth momentum in the Australian economy, outside of housing, remain elusive, says Bank of America. 

Domestic demand is weak in an environment in which resources investment is declining sharply, growth in nonresource sector investment remains inconsistent and public sector investment is reflecting contractionary fiscal policy settings. 

A lower AUD should assist in supporting a stabilisation of growth in H2 albeit at a sub-trend rate. Yet this will likely be enough to stop the RBA from having to ease policy further, although it is likely to maintain a soft easing bias for some time.