Long-term bottoming process for AUD - SocGen

Alvin T. Tan, Research Analyst at Societe Generale, explains that the RBA expects GDP growth to pick up over the next two years to over 3% per year, implying above-trend growth will persist which is likely to support the Australian currency.

Key Quotes

“The three major ratings agencies recently affirmed Australia's AAA sovereign rating. That being said, it is not all sunlit uplands for the Australian economy.”

“Australian labour market data flow has improved noticeably in recent months, but the labour market remains mixed, with weak wage growth and falling retail employment. The downturn in mining investment is now mostly behind us, but non-mining investment has been tepid outside of the residential housing sector.”

“Beyond Australia, we are looking for the Chinese structural growth slowdown to reassert itself again later this year, especially after the CPC party congress in 3Q17. Chinese credit growth has decelerated recently amid tightening liquidity. This should affect both iron ore prices and the Australian dollar exchange rate negatively. However, we also believe that the DXY Index peaked in 1Q17, and we expect the dollar to fall gradually in the coming quarters. The dollar downturn should support AUD/USD.”

“We expect the RBA to stay on hold through the rest of the year. The RBA would be able to tighten monetary policy in 1H18 if growth and inflation were to rise as it expects. The combination of RBA tightening and a secular USD decline argues for going long AUD/USD on another major dip. Drawing from the 2008 low through the 2016 low, the resulting trend line is around 0.70 currently. Beyond this are the 2015-16 lows at 0.68-0.69, which should hold, in our view. Thus, a dip in AUD/USD towards 0.70 should provide a good opportunity to position for the subsequent long-term appreciation trend.”