27 Feb 2015
Medium-term fundamental rationale supporting a weaker AUD – BAML
FXStreet (Barcelona) - The BofA-Merrill Lynch Team explains that in spite of AUD ending February marginally higher, policy divergence, fundamentals and the risk of a sizeable CNY depreciation will keep the Aussie weak.
Key Quotes
“The news flow from Australia has been generally negative over February – a surprise 25bp rate cut by the RBA, weak employment data and subdued investment intentions for 2015-16. Yet AUD is ending the month marginally higher versus the USD and on a trade-weighted basis.”
“As is often the case, this is symptomatic of a crowded trade and consistent with evidence that the market is very short AUD. This positioning may limit the near-term impact of a March rate cut, much as it did in February.”
“Beyond the positioning risk however, we think the medium-term fundamental rationale for a weaker AUD remains compelling.”
“Lower commodity prices and deterioration in vol-adjusted carry have fueled the recent drop in AUD. But Australia's balance of payments reckoning for 2015 has yet to transpire and based on the RBA's communication, policy divergence will likely remain negative vs the USD, where Fed tightening seems imminent.”
“Moreover, we believe the RBA will not dial down its concern around currency strength in its statement and risk undoing the "hard-fought" depreciation that has been achieved over the past few months.”
“The risk of sizeable CNY depreciation adds to our bearish conviction on the AUD.”
Key Quotes
“The news flow from Australia has been generally negative over February – a surprise 25bp rate cut by the RBA, weak employment data and subdued investment intentions for 2015-16. Yet AUD is ending the month marginally higher versus the USD and on a trade-weighted basis.”
“As is often the case, this is symptomatic of a crowded trade and consistent with evidence that the market is very short AUD. This positioning may limit the near-term impact of a March rate cut, much as it did in February.”
“Beyond the positioning risk however, we think the medium-term fundamental rationale for a weaker AUD remains compelling.”
“Lower commodity prices and deterioration in vol-adjusted carry have fueled the recent drop in AUD. But Australia's balance of payments reckoning for 2015 has yet to transpire and based on the RBA's communication, policy divergence will likely remain negative vs the USD, where Fed tightening seems imminent.”
“Moreover, we believe the RBA will not dial down its concern around currency strength in its statement and risk undoing the "hard-fought" depreciation that has been achieved over the past few months.”
“The risk of sizeable CNY depreciation adds to our bearish conviction on the AUD.”