AUD/USD: Capped at 0.6650 – Westpac

The Australian dollar has historically acted as a buffer for the economy in times of global uncertainty. This was very much the case during the GFC for instance and it appears to be part of the RBA’s playbook now, in the opinion of economists at Westpac Institutional Bank.

Key quotes

“In the Feb SoMP, the RBA noted that the A$ ‘is also likely to depreciate in a more severe [virus]scenario , which would provide some offsetting support to the domestic economy’.”

“Courtesy of the fact that market pricing for the Fed has moved so materially and that commodity prices, or at least the commodity prices that Australia specialises in exporting, have been remarkably stable, our measure of fair value has risen. Indeed, as of Friday last week, it had risen to 0.6720, the highest level in two months.”

“Now we argue that iron ore prices will succumb to the gravity that absolute record high levels for steel inventory in China and the likelihood that iron ore port inventory rises in the weeks ahead implies. Thus we tend to see the A$ remaining capped by 0.6650.”

“However, with a falling US$ and money markets pricing in another aggressive Fed cut March 18, it probably pays to consider the risks from the short term upside that our fair value framework implies.”