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We noticed the two main risks to the bearish AUD view are that (1) the currency is dragged higher in a more sustained re-rating of the global growth outlook and that (2) better global news and some signs of housing resilience see the RBA play for time. We remain of the view that the RBA will ease a further 50bp in this cycle.
Since our NZD outlook piece in November 2016, the economy has continued to perform strongly in real terms. GDP growth was over 1% QoQ in Q3, which would see the economy rounding out the year with annual growth comfortably above 3%. Still, much of the upside surprise in activity indicators is owed to the positive supply shock from migration (refer above chart).
We expect that growth impulse to fade through 2017, which would deliver growth performance more in keeping with subdued inflation and would also remove some of the pressure on housing.
Hence, we foresee AUDNZD potential below 1.0350 upto 1.0235 levels in medium terms. Higher to 1.0425, mainly for valuation reasons. The cross remains well below fair value estimates implied by interest rates, commodity prices, and risk sentiment. However, we acknowledge Australia’s AAA downgrade risk, any such action likely to delay any return towards fair value during the next few months.
