AUD: Supported by strong inflows – Westpac

Robert Rennie, Research Analyst at Westpac, suggests that they have stuck with a strong outperformance theme on the A$ for some time now and part of this view was based on their expectations of more stable growth in China and stronger commodity prices as a result while part was based on their view that capital inflow into Australia would remain robust and much more heavily focused on equity than debt.

Key Quotes

“The recent balance of payments statistics added another layer of detail on several significant shifts in both the size of Australia’s current account deficit and its sources of funding. The most obvious shift was the dramatic narrowing in the current account deficit, with the goods and services component registering its largest positive outcome in history (data back to 1960) thanks to the resource investment boom driving strong volumes and the sharp rebound in Australia’s terms of trade.”

“Given that commodity prices have remained strong in Q1 and are likely to continue so for some time, this story will continue well into 2017. With the primary income deficit also on the wane due to narrowing yield differentials, Australia’s reported current account deficit was the smallest back to 2001 and the prospects for further narrowing are good.”

“Now all the above sounds somewhat academic given that the current account deficit has narrowed and will likely remain so as long as commodity prices are high and volumes rise. However, we argue the mix of funding was less supportive than official data suggested in 2014/15 but stabilised through H2 2015 and into 2016 as the nature of funding improved. Given the M&A pipeline and strong commodity markets, we expect this story to continue well into 2017. This all neatly fits in with our outperformance view, that the A$ will remain strong through much of 2017 until higher US rates and weaker commodity prices see weakness later this year and into 2018.”