AUD: Limited options? – Rabobank

Jane Foley, the senior FX strategist at Rabobank, notes that given the optimism that washed over market sentiment last week it stands to reason that the AUD is the best performing G10 currency on a 5-day view.

• “Given Australia’s geographical position and its strong trade links with China, it is often traded as a loose proxy to the latter’s economic outlook. The recent recovery in the AUD belies the fact that in the year to date the AUD has dropped around 2.71% vs. the USD. That said, this move can be largely attributed to the fact that the USD is one of the best performing G10 currencies in the year to date. The drop in the value of the AUD this year is likely to be insufficient to put much of a dent in the debate about the need for further policy stimulus in Australia in the months ahead.
• The proactive nature of the RBA’s rate cuts in June and July did have some impact on undermining the value of the Aussie. That said, the AUD is still positioned towards the top of the table in terms of G10 currency performance in the year to date.
• Frydenberg has indicated that the government was negotiating a new agreement with the RBA to “strengthen” the conditions around the central bank's inflation target. Currently, the Bank is mandated to target CPI inflation between 2% and 3%. The implication is that the RBA is likely to be under pressure to ease monetary conditions further. Given that the rates may soon be approaching a floor, the debate about whether QE could be used in Australia is likely to remain alive despite Lowe’s conclusion that “we risk just pushing up assets prices”. We expect AUD/USD to edge towards the 0.65 area on a 12-month view.”