Union Bank of Switzerland’s analysis team points out that the RBA chief Lowe on Friday has bucked the trend by raising the possibility that rates will need to go up with global expectations mounting for easier monetary policy.
Key Quotes
“In normal circumstances, this kind of talk might be expected to boost a currency. But on balance, we think AUD is more likely to depreciate further. Here’s why:
1. Domestic economy in Australia remains weak. Wage data has been soft, increasing risk that core inflation will remain below target for longer. The housing market continues to deteriorate. Higher scrutiny on foreign buyers and incremental taxes have already led to a decline (-14% y/y) in the value of housing foreigners bought last year.
2. This softness is increasing the probability that Australia will be the first G10 central bank to start cutting rates.
3. Australia’s economic reliance on China poses additional risks, with Chinese GDP set to slow to a 28y low of 6.1% this year. Any stimulus in China is unlikely to repeat the commodity-fueled binge of 2009. A reported ban on Aussie coal imports in China’s Dalian port hints at strains on diplomatic ties.”
“So, while we appreciate RBA’s optimism, we find it more prudent to position for further AUD weakness. With oil prices likely to head higher, & a renegotiated NAFTA behind us, we prefer CAD to AUD.”
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