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Insofar as the Reserve Bank of Australia’s (RBA) new QE policy is designed to take the edge off the attraction of the aussie as a carry trade, AUD bulls are likely to face a few hurdles in the New Year. What’s more, reports that China had formally black-listed Australia coal, if verified, would be a huge blow, economists at Rabobank brief. 

Key quotes

“To date, the export goods that have been impacted by Chinese/Australian trade issues are unlikely to dent total Australian GDP significantly. These include barley, beef wine and few other agricultural exports. This week’s headlines, however, regarding coal and iron ore refer to Australia’s largest exports. Thus his increase in tensions focussed on these goods could be far costlier to Australia’s economic outlook.”

“The RBA has stated that it does not expect to increase the Cash rate for at least 3 years. Moreover, the minutes of the December policy meeting confirm that it intends to keep the size of its bond purchasing programme under review. The RBA has been candid in its explanation for why it introduced a longer dated QE programme last month. This was to reduce the attraction of relatively high yielding Australian bonds to overseas investors and thus to temper demand for the AUD.”

“In an environment marked by expectations that the Fed will continue to use its balance sheet to support the USD economy and depress the USD, AUD/USD looks set to remain well supported. However, bulls should beware of the potential pitfalls facing the AUD. We suspect upside potential will be tempered. Our 12-month forecast stands not far from current levels at AUD/USD 0.76.”