AUD/USD: Strong headwinds - Westpac
AUD/USD has faced some strong headwinds so far this month, at one point last week driving it down more than 3% to around 0.7760, wiping out all of January’s steep gains, explains Sean Callow, Senior Currency Strategist at Westpac.
Key Quotes
“The factor which of course dominated media headlines was the return of equity volatility. Such volatility (especially to the downside) is historically bad news for the Aussie, given the Australian economy’s sensitivity to global growth and investor risk appetite.”
“So it seems the rebound in US stocks into Friday’s close is helping AUD/USD to start the week on a steadier note, around 0.78. The equity turmoil wasn’t obviously driven by news or data, though it may be the case that, having hit record highs, equity markets were vulnerable to investors switching to the rising yields on offer in bonds. The 10 year treasury note yield has risen from around 2.40% end-2017 to above 2.80%.”
“Wages growth picked up in January, pointing to higher inflation ahead. Moreover, looser fiscal policy – both the tax cut package and last week’s agreement to increase spending and suspend the debt ceiling – suggest higher yields to come. If this is indeed what has been upsetting equity markets, then it is a story that will persist for quite some time, a potential cap on the Aussie dollar.”
“On the home front, the RBA returned from its summer break with a flurry of commentary. We saw the February decision statement, a speech by Governor Lowe and the quarterly Statement on Monetary Policy. Overall, their expectation of the economy is constructive, with a positive view of growth and a belief that inflation will eventually return to target.”
“However, considerable uncertainties remain, most notably for the consumer who remains reluctant to spend. The RBA makes clear it will be patient waiting to see wages and inflation rise and growth strengthen. Of these indicators, wages seem to be critical.”
“Market pricing for the RBA to lift its cash rate from 1.5% by Dec 2018 started to fade in late January on the soft Q4 inflation data and continued last week amid the equity gyrations, down to a 60% chance. Westpac is sticking to its long-held view of no change in 2018, with some other forecasters now joining us.”
“In the week ahead, the domestic data highlight will be Jan employment, to see if the rapid pace of job creation can be sustained (Westpac forecast +15k jobs, 5.5% unemployment rate).”
“The US focus will be Jan data on retail sales and consumer prices. If these continue to support US market pricing of >80% chance of yet another Fed rate rise on 21 March and commodity prices remain skittish (weakness in energy prices most notable), then AUD/USD should chop a little lower in the week ahead, trading mostly say 0.7700-0.7850.”