Westpac: Last week the Aussie dollar rallied on both the RBA and Federal Reserve (FOMC) minutes, before pulling back on
somewhat misinterpreted headlines regarding Australia’s AAA rating (in short, it is safe for some time). With AUD/USD
almost 2 cents above the post-rate cut lows, it is fair to ask whether there is substantial further upside near term?
We suspect not. To be sure, the market was right to lower the probability of a March cut in response to the minutes.
But another easing is fully priced by May and yet another cut, to 1.75%, by Dec 2015. This is 25bp lower than Westpac’s
base case, a factor in our more positive view on AUD/USD in H2 2015. But near term, it is hard to see AUD gaining
much from the interest rate outlook, with the RBA minutes seemingly taken as cause for some rearrangement in Q1 vs
Q2 rate cut risks but not producing doubts over the scale of further easing.
somewhat misinterpreted headlines regarding Australia’s AAA rating (in short, it is safe for some time). With AUD/USD
almost 2 cents above the post-rate cut lows, it is fair to ask whether there is substantial further upside near term?
We suspect not. To be sure, the market was right to lower the probability of a March cut in response to the minutes.
But another easing is fully priced by May and yet another cut, to 1.75%, by Dec 2015. This is 25bp lower than Westpac’s
base case, a factor in our more positive view on AUD/USD in H2 2015. But near term, it is hard to see AUD gaining
much from the interest rate outlook, with the RBA minutes seemingly taken as cause for some rearrangement in Q1 vs
Q2 rate cut risks but not producing doubts over the scale of further easing.
Australia’s data calendar should also start to chip away at AUD’s improved mood. Starting from Wed, we will see inputs
to the Q4 GDP report due 4 Mar (the day after the RBA meeting). Most sensitive for AUD next week will be the capex
(business investment) survey. Along with a fall in Q4 actual private capex, we expect a downbeat reading on investment
intentions for 2015/16 (fi rst estimate) and at best stable on the 2014/15 investment plans. This could be enough to
nudge pricing for a March cut to nearer 60%.
On the commodity side, the lunar new year holidays mean little fresh direction on iron ore, but at $63, it is hardly
inspiring confi dence that a cycle low is in place. On the US side of the AUD/USD equation, some patchy US data in
recent weeks plus the wary tone of many Fed members in the 28-29 Jan FOMC minutes have slowed USD momentum
somewhat. However, Fed chair Yellen is likely to help USD steady with fairly upbeat testimony this week. Early in the
week AUD/USD should range around 0.7800 (the deal on Greece helps global sentiment) but over the month ahead, we
still see risks tilted to new post-2009 lows, in the 0.75-0.76 region.
to the Q4 GDP report due 4 Mar (the day after the RBA meeting). Most sensitive for AUD next week will be the capex
(business investment) survey. Along with a fall in Q4 actual private capex, we expect a downbeat reading on investment
intentions for 2015/16 (fi rst estimate) and at best stable on the 2014/15 investment plans. This could be enough to
nudge pricing for a March cut to nearer 60%.
On the commodity side, the lunar new year holidays mean little fresh direction on iron ore, but at $63, it is hardly
inspiring confi dence that a cycle low is in place. On the US side of the AUD/USD equation, some patchy US data in
recent weeks plus the wary tone of many Fed members in the 28-29 Jan FOMC minutes have slowed USD momentum
somewhat. However, Fed chair Yellen is likely to help USD steady with fairly upbeat testimony this week. Early in the
week AUD/USD should range around 0.7800 (the deal on Greece helps global sentiment) but over the month ahead, we
still see risks tilted to new post-2009 lows, in the 0.75-0.76 region.
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