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AUDUSD having tumbled from 0.7200 mid-April to the high 0.68s mid-May as soft Australian data and RBA rhetoric pointed to a minimum of 2 cash rate cuts, AUDUSD price action has been a lot more mixed in recent weeks. Five-year highs on iron ore prices have provided some light amid gloom for other key commodities and record short A$ positions by real money accounts in futures markets suggest plenty of bad news priced in.
Despite being half-way through an easing cycle, AUD has shown a certain degree of resilience over the last month. Global central bank easing, expectations of a fiscal boost through tax cuts, some improvement in China activity data and iron ore prices have likely contributed to that firmness. And with the RBA poised to hold for some time (we expect the next cut in February), AUD may muddle along in the near-term. But the key cyclical and structural headwinds that inform our bearish view of AUD (0.65 by 2Q’20) are still very much unresolved, Starting with the 0.7% gap between current unemployment levels and the RBA's NAIRU target. Concerns over the housing market affecting consumer behavior remain, while the still-slowing global growth backdrop does AUD few favors in the medium-term.
Our conviction that the RBA will indeed be compelled to ease further were reinforced this week following RBA Gov. Lowe's comments that should the aforementioned supports fail to sustain a growth rebound, the additional easing will be necessary.
He also intimated that low-for-long remains likely, which should prove to be a drag on a high-beta currency that is historically a G10 high-yielder. There remains 10bps of cuts to be priced to meet our forecasted terminal rate, and the reality of slowing global growth as the RBA eventually returns to easing is likely to continue to weigh on AUD over the coming months. Some near-term catalysts worth watching closely include 2Q CPI (which the RBA has perennially undershot) and retail sales ahead of the central bank meeting on 8 August.
Meanwhile, the upcoming RBNZ meeting offers an opportunity to recoup some of the P&L on our NZDJPY put spread. We maintain our expectations of 50bps of easing in 2H’19 from the RBNZ, who seem to be coming up short on its 3% growth target required to achieve its inflation objective. We, therefore, expect a cut at the upcoming August meeting, which looks only about 70% priced on a 1m forward basis. And given that risks appear to be to the downside on their growth forecasts, tweaks will likely be necessary to the MPR that will infer additional cuts on the horizon. This could make for a dovish meeting and temper some of the NZD resilience that has likely been a thorn in the side of the RBNZ. Other notable developments include reports that the RBNZ is reviewing the case for unconventional monetary policy. And while strictly a risk-management exercise at this point, it highlights the fact that rates could, in fact, go negative in New Zealand, an idea that was previously uncontemplated but is now in the potential range of outcomes.
Hold short AUDCHF in cash, marked at -0.32%
Hold a 6m NZDJPY put spread. Paid 1.07% on 31stMay. Marked at 0.45%. Courtesy: JPM