AUD: Likely to trade in range - ANZ

The AUD is likely to continue to trade in a narrow band against the USD, at least in the near term as the domestic backdrop and the risk environment remain supportive but, at current levels, they are unlikely to provide the AUD with enough momentum to break the range anytime soon, according to Giulia Lavinia Specchia, Research Analyst at ANZ.

Key Quotes

“Domestically, the growth outlook remains solid and the RBA’s recent shift in bias – which prompted us to pencil in two rates hike in 2018 – means the AUD remains well supported. That said, this tightening cycle is likely to be very shallow; and a move of this magnitude has largely been accounted for by investors. The net result is that, at current levels, the AUD is unlikely to get much impetus from the domestic backdrop.”

“On the relative policy front, the recent hawkish turn at the US Federal Reserve pushed the probability of a December hike higher (~60%), driving a relief rally in the USD. But while the market’s pricing remain conservative for 2018, a significant reprice of the Fed for next year would need to see rising inflationary pressures first; meaning that, at this stage, we remain far from a turning point in the USD.”

“On the commodity front, while iron ore prices have plunged, our commodity strategist is not bearish on the medium-term outlook and expects iron ore prices to stabilise around the mid-sixties over the medium-term. Besides, our analysis shows that the correlation between the AUD and iron ore is currently very low (~0.05), meaning that any impact of the recent drop in commodities on the AUD should be largely contained.”

“Finally, the global economy continues to look solid with low volatility, and market sentiment remains broadly supportive of risky currencies. But to us this seems to be ‘as good as it gets.’ We don’t see a reversal anytime soon, especially as long as the growth environment remains positive. So we don’t think the AUD can get a persistent boost out of the current risk environment.”