AUD should benefit most from industrial reflation in the US and China - RBS

According to the analysts at RBS, In 2017 commodity currencies will be affected by the stronger USD but the AUD should benefit most from industrial reflation in the US and China.

Key Quotes

“We expect the RBA will be the least likely of the commodity currency central banks to cut interest rates again from 1.50% in 2017 given stronger reflationary pressure globally and as Australia’s domestic economy is expanding around its potential growth rate of 3%. Underlying inflation at 1.3-1.7% is below the central bank’s 2-3% target range as Chart 2 shows. But the RBA expects core inflation measures will start to firm upwards into a 1.5-2.5% range over 2017.”

“The main risk to the RBA’s reluctance to cut interest rates further is uncertainty over Australia’s labour market.”

“Thus for 2017 we expect the main risks to our constructive view on the AUD against the NZD and CAD will come from any deterioration in Australia’s monthly labour market reports that spurs the RBA to consider reinstating an easing bias.”

“In the absence of any further rate cuts from the RBA, we expect the AUD will remain a sell on rallies above the mid-point of this year’s 0.68-0.78 range against the USD given the likelihood of the Fed raising interest rates at a faster pace in 2017. But we think dips in AUDNZD below 1.05 will not be sustained.”