Downtrend still intact
Further slippage overnight has taken AUDUSD down to fresh 4-year lows. US dollar
strength in the wake of Friday’s strong nonfarm payrolls print was a contributing factor,
but the Australian dollar’s troubles run deeper still.
Looking overseas in general
Already, a key force that had kept the currency aloft over recent years has noticeably
waned. Inflows into Australian bonds fell sharply in Q3, dropping to levels not seen
since 2008, according to data released last week. We see little
chance of a sudden revival here over coming quarters, especially as healthy sovereign
demand for renminbi assets continues to divert would-be inflows away from Australia.
Looking to Switzerland in particular
AUD inflows are still possible from pockets of the reserve manager community though,
but these are unlikely to be strong enough to tilt the scales in favour of AUDUSD
upside, in our view. For example, we think possible FX intervention activity by the Swiss
National Bank (SNB) in EURCHF has been very light so far – amounting to no more than
CHF 4 bn over recent weeks.
The China dimension
Compounding the aussie’s woes, trade data overnight showed another significant
decline in Chinese imports from Australia in November. The dominance of iron ore in
Australia’s export basket explains the fall. Iron ore imports to China dropped sharply –
both in volume and in value terms. With the outlook for the Chinese
property market still very weak, we expect the China angle to continue to weigh on
AUDUSD until well into 2015.
And, returning to the US dollar story…
We foresee plenty more room for the US dollar to advance. Our bullish US dollar
framework envisages three overlapping phases of dollar upside – the first consisting of
apparent dollar strength thanks to currency weakness elsewhere. Phase 1 is now well
underway, courtesy of Messrs. Draghi and Kuroda. Rising US yields from the 2y point
and out would comprise Phase 2, attracting further dollar-supportive real money
inflows. Friday’s payrolls report seems to have ushered in this new second phase, with
2y yields now at multi-year highs. Phase 3 will occur when 3m USD Libor starts to climb
too, affecting borrowing costs in USD and therefore FX hedging decisions in particular,
but this third stage has yet to ignite.
To sum up
Taken together, that’s a pretty bearish backdrop for AUDUSD, and we see good
reasons to expect a test of 0.8000 during 2015.