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AUDUSD has extended gains today from the lows of 0.7614 to the current 0.7642 levels after China reported a USD 51.35 billion trade surplus in January of 2017, lower than a USD 56.67 billion surplus a year earlier but above market consensus of a USD 47.90 billion surplus.
Tempering growth momentum: The Aussie dollar has rallied from the January lows on fading Chinese growth fears and rising iron ore prices. Growth has proven to be robust, as domestic demand and net exports more than made up for enduring weakness in business investment. The unemployment rate has consequently declined through the course of the year. The economy’s growth momentum, however, has moderated and is expected to continue to do so through H1’17, with retrenchment in residential construction activity. Moreover, inflation should stay under target in coming quarters.
This has kept the RBA on hold at 1.50% for the fifth consecutive board meeting as it prepares to release new forecasts expected to show a marked downgrade in both inflation and economic growth. The update, to be released on Friday, will be accompanied by a statement from Governor Philip Lowe outlining his thinking about the year ahead. He will also outline his thinking in a speech to be delivered in Sydney on Thursday night
Extended AUDUSD bottoming: The Aussie dollar will weaken against the US dollar from a combination of monetary and growth divergence in 2017. The Chinese growth slowdown is also expected to resume next year. On the other hand, AUDUSD should hold above the January low of just above 0.68, so we are expecting an extended bottoming process.
AUD at fair value: The underlying long-term picture for AUD has improved, with the Australian terms of trade having turned higher in recent months. As such, the valuation mean reversion that drove the currency lower since 2011 has ended (refer above graph).
China remains the key risk: The key risks to the AUD outlook are from the external environment, namely the Chinese economy and commodity prices. The Aussie dollar is the G10 currency most exposed to China, which is the destination for nearly one-third of Australian merchandise exports. China and Hong Kong together are the largest positive contributors to the Australian trade balance, followed by Japan. Hence, any sharp weakening in Chinese demand would have a major negative impact on Australian growth (refer above graph).
