AUD: Policy outlook keeps currency downside risk intact
Regardless of improved risk sentiment we expect the AUD to remain a sell on rallies, at least against the USD. This is mainly due to the risk of the RBA turning more dovish. Although the latest employment data suggests improving labour market conditions the risk of further slowing price developments remains intact. This is mainly due to weak external demand conditions as related to Asia and weak commodity price developments. Accordingly it cannot be excluded this week’s CPI will disappoint. Under such conditions the RBA is likely to continue regarding monetary conditions as too tight, which will continue to be reflected as they maintain a cautious stance when it comes to the AUD’s overvaluation. All of the above stands in contrast to the US. Further improving growth prospects and the Fed regarding more muted inflation expectations as transitory, should keep investors’ Fed rate expectations well supported. As such there is room of further diverging RBA-Fed rate expectations to the detriment of the cross. We sold AUD/NZD at 1.0650 with a stop loss at 1.11and a target of 0.9800.