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AUD/USD has been pressured by weak inflation numbers and China, as always.

The team at ANZ sees further downside potential:

Here is their view, courtesy of eFXnews:

Our framework suggests that the recent decline in the AUD did not make it excessively cheap, and this will limit the veracity of the counter-trend rally that’s currently in play.

While volatility consolidates, the focus may turn back to the fundamental drivers of the AUD. There, rate cut expectations are growing and commodity prices are declining still.

On the domestic front, dynamics are equally unsupportive. Data surprises have turned negative, while at the same time out-of-cycle rate hikes from the major banks (in response to higher capital charges) are raising expectations of further easing from the RBA.

AUD diverging from economic fundamentals

Looking at history suggests that ultimately it is economic fundamentals that win out. In January 2015, when the ECB first announced its foray into unconventional policy, the AUD managed to rally a measly 2%, while in 2014, as economic fundamentals deteriorated in the face of BoJ easing, the AUD depreciated precipitously.

As such, we continue to expect that the AUD will push back below USD0.70.

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