The AUD will be a big talking point over the next quarter particularly as the currency faces significant challenges from a global macroeconomic and domestic front. The RBA has maintained a fairly neutral stance on rates since 2013 and the line ‘period of stability in rates’ doesn’t seem to be going anywhere anytime soon. Despite this fact, analysts have increasingly grown dovish and they have been many calls suggesting rate cuts could be on the way this year. As a result, the next couple of months will be crucial for policy as the RBA is likely to assess how the first quarter progresses very closely. One section of the economy that’ll need to be monitored very closely will be Australian jobs as we’ve recently seen a blowout in unemployment to decade long high of 6.3%, and of course not to mention Australia is already in an income recession.
Apart from jobs, inflation will also have to be watched very closely given the impact weaker oil prices are having globally. A drop off in retail sales locally will also keep inflation subdued while cooling house prices will have an impact on confidence. Given the RBA is trying to drive the economy out of being heavily commodity reliant and we’ve already heard RBA Governor Glen Stevens saying borrowing costs are not the problem in Australia, then we really need to see a pickup in personal and private sector credit to show confidence is picking up. The next GDP reading is on March 4th and I feel that’ll be a pivotal moment for policy going forward. RBA language will also have to be watched very closely for any signs of a shift in tone. From a rates perspective, the market is pricing in about 41 basis points worth of cuts over the next 12 months. That’s fairly aggressive considering how ‘neutral’ the RBA currently is.
Sell rallies in AUD/USD
While investors were largely short the AUD in the back end of last year, AUD positioning so far this year has actually moved into neutral territory from short, primarily driven by buying from Japan. AUD/USD traded through $0.8200 yesterday but has since given up some ground as the USD comes back to life. The slide in oil prices is also keeping the brakes on risk and supporting the safe haven trade. Over the next three months I expect the choppy trade to remain intact with traders using strength as an opportunity to sell the pair. I still feel around 0.8300 presents the best value proposition given the neutral point is around 0.8118 where the 3-month forward rate lies.