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FxWirePro: Commodity prices cushion AUD while RBA drives backseat for AUD/USD

Amid the ongoing transition in Australia's economy, the country continues to be a major resources producer, with much of its exports to the rest of the world made up of materials such as iron ore, coal, basic metals, and liquefied natural gas and energy products.

Average monthly prompt gold prices also increased by nearly 5% but as silver’s return tripled gold’s on a percentage basis the gold-to-silver ratio dropped to average around 67:1 throughout the month, down from 74:1 in June.  

A high-frequency measure of prices for Australia’s exports has risen almost 40% from the Q1’16 lows. Iron ore is up 61% from the Q4’15 lows. So when we account for the rise in commodity prices, AUDUSD still looks a little on the rich side

We still reckon the pair has more potential to decline through to mid-2017. The currency looks elevated relative to interest rate differentials, and we are forecasting a retracement in key commodity prices from here. Still, we continue to be surprised by the resiliency in the currency and we now forecast AUDUSD to reach USD 0.73 by end 2016 (prior forecast 0.72), and USD 0.67 by Jun-17 (unchanged).

However, the monetary policy drivers take a back seat for AUD in coming months. With the RBA now on hold for the remainder of 2016 (having cut rates by 50bp in Q2/Q3 in response to an inflation shock).

The Fed seems most likely to be on hold until late in Q4 once money market reforms and the Presidential election are out of the way, it is hard to argue that monetary policy expectations will have much of an effect on AUDUSD in coming months.

The current compression in front end rate differentials as the RBA has cut rates has had a negligible impact on AUDUSD of late, suggesting that the level of front end rates – and expectations about the path of front end rates – have had less influence on AUD than historical experience would suggest.

Indeed, a regression of AUDUSD on the AUD-USD 2Y swap differential over the last 4 years currently shows the residual to be at its highest level.

So, RBA is not yet done with easing rates while China continues to woe the resurface.

Data radar to watch out for in next fortnight:

RBA Meeting (Sep): 6th September  

GDP (Q2): 7th September

FOMC Meeting (Sept): 21st September.

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