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Jane Foley, senior FX strategist at Rabobank, notes that measured from its early October low AUD/USD has risen around 4.4% making it one of the better performing G10 currencies in this time frame.

Key Quotes

“A strong factor behind the recovery into the final months of the year has been optimism regarding a cooling of trade tensions between the US and China. This implies an improved outlook for Chinese growth which in turn bolsters the outlook for Australia’s external sector. This outlook has coincided with a wave of market speculation that the odds of a US recession this year are falling.”

“Together these factors imply that the recovery in the AUD/USD may have further to run over the coming weeks and potential over the months ahead. That said, we expect the rally will run out of steam into the spring and expect AUD/USD to move lower on a 3 month view.”

“The AUD is sensitive to expectations regarding global growth and there are various ways that this can be rationalised.”

“Going forward its seems to reasonable to assume that the AUD will remain sensitive to the global growth outlook with a particular focus on the outlook for China.”

“Weak wage growth, drought and forest fires are significant headwinds for the economy. These factors coupled with the recent recovery of the AUD raise the risk that the RBA will cut rates again at its next policy meeting on February 4. We would look to sell rallies above AUD/USD 0.70 and look for a move back towards the 0.67 area of a 3 month view.”