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10 Jun 2014
Strong case for AUD weakness in coming months - Nomura
FXStreet (Bali) - Charles St-Arnaud, FX Strategist at Nomura, published an extensive research report on the AUD outlook, noting that while there is a strong case for downside potential in the coming months, there are risks to be considered.
Key Quotes
"The decline in commodity prices and the associated terms of trade deterioration suggest that AUD should be weaker. Moreover, our analysis of the commodity trade flows suggests that we may have yet to see the full impact of weaker prices on economic data, which means that the economy, and ultimately the currency, will likely be slow to adjust. Therefore, we believe that there is a strong case for some weakness in AUD in coming months."
"Moreover, given concerns over the effect on Australian commodity exports from a slowdown in China and the fact that we may have yet to see the impact of weaker commodity prices on the trade balance, the downside risks remain elevated."
"Also, the view of a stronger USD in the second half of the year, as US growth accelerates, should also either keep AUD contained or cause it to depreciate."
"However, positioning appears to have been the major driver of AUD in recent years, and a further increase in net long speculative positions could allow the currency to remain strong."
"With the economy improving and market pricing in a first hike in 2016, there is a risk that we could see a repricing of expectations towards our call of an RBA rate hike in the first half of 2015, likely in Q1."
"In addition, further improvements in Chinese economic indicators could lead to an increase in long AUD positions and further support the currency. Moreover, there is also a risk that, with extremely low rates in G3 countries and FX volatility close to its lowest level on record, we could see some inflows into AUD assets, especially with the improved economic outlook and the removal of rate cut risks."
Key Quotes
"The decline in commodity prices and the associated terms of trade deterioration suggest that AUD should be weaker. Moreover, our analysis of the commodity trade flows suggests that we may have yet to see the full impact of weaker prices on economic data, which means that the economy, and ultimately the currency, will likely be slow to adjust. Therefore, we believe that there is a strong case for some weakness in AUD in coming months."
"Moreover, given concerns over the effect on Australian commodity exports from a slowdown in China and the fact that we may have yet to see the impact of weaker commodity prices on the trade balance, the downside risks remain elevated."
"Also, the view of a stronger USD in the second half of the year, as US growth accelerates, should also either keep AUD contained or cause it to depreciate."
"However, positioning appears to have been the major driver of AUD in recent years, and a further increase in net long speculative positions could allow the currency to remain strong."
"With the economy improving and market pricing in a first hike in 2016, there is a risk that we could see a repricing of expectations towards our call of an RBA rate hike in the first half of 2015, likely in Q1."
"In addition, further improvements in Chinese economic indicators could lead to an increase in long AUD positions and further support the currency. Moreover, there is also a risk that, with extremely low rates in G3 countries and FX volatility close to its lowest level on record, we could see some inflows into AUD assets, especially with the improved economic outlook and the removal of rate cut risks."