FxWirePro: Glimpse through AUD/USD and swap rates ahead of American and Ausiee central banks actions

It was a quiet day in markets yesterday. The Aussie tumbled ahead of speeches of FOMC Member Kaplan and later in the week from Fed Chair Yellen.

Ahead of next month’s RBA’s monetary policy, we wish to shed some light on AUDUSD as it is expected to decline modestly through 2017 on skinnier rate differentials and weaker terms of trade profile.

However, the lower conviction in the US wage and inflation outlook, persistent weakness in the USD, solid Chinese growth in 2017 so far and strength in spot commodity prices mean that the pace of decline is likely to be slower. If the RBA remains firmly on hold, as we expect, and the US dollar rises on tighter Fed policy, then AUDUSD could fall to 0.76 by year-end.

We, therefore, make further upward revisions to our forecast trajectory. Our Dec-17 target is adjusted higher to USD 0.76 (prior was USD 0.73).

By 2Q’18, we forecast AUD to USD 0.72 (prior was USD 0.67).

Well, on the contrary to our expectations, AUDUSD decisively broke out of its long held USD 0.72-USD 0.78 range last month.

Another bout of USD weakness and a misinterpretation of the RBA's July Board meeting minutes conspired to push AUDUSD above USD 0.80c.

The medium perspectives on AU swap yields: The RBA outlook (on hold for some time) is affixing short-redemption interest rates and should keep 3yr swap rates in a 1.8% to 2.3% range, as long as core inflation remains below 2%. Longer maturity rates will largely follow US rates.