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The Chinese rate cut has done little to inspire confidence in the local unit, with some traders even looking to sell AUD/JPY, as a hedge against longer-term negative issues stemming from the Chinese deleveraging process.
Many feel that there is a declining credit efficiency problem in China and thus even if we do see further easing (which looks inevitable), it is not going to have a significant impact on commodity currencies. Many are also watching the USD/CNY and a move higher from here could actually work against the AUD, as it would effectively bring China more intimately into the global currency war and support the disinflationary pressures we are seeing.
Yesterday afternoon RBA Deputy Governor Lowe caused a move lower in the AUD. In fairness, Mr Lowe did talk up Australia medium-term prospects, but suggested the RBA can lower rates if needed, while saying he thinks ‘the AUD can still stay structurally high’. These comments are hardly new or significantly insightful, but it does show the door is open to a cut.
We also heard from the Organisation for Economic Cooperation and Development (OECD) who urged the RBA to raise rates in Q2 to help cool the ‘booming housing market and mortgage lending’. To me, these comments have merit but cooling the property market will predominately be down to actions from APRA this year and we also need to be mindful of inflation.
The RBA themselves see inflation anywhere between 1.50% and 2.5% in the June quarter. Given the RBA has a single mandate of price stability, if inflation does fall to 1.50% and property prices do start to respond to macro prudential tools, then it’s hard to see why they would raise rates and you’d even say they should cut rates. It seems, therefore, the Australian economy will be the big unknown for 2015.
We all know Europe and Japan are stuck in a disinflationary environment. We know the U.S is growing above 3% in real terms. The UK is also looking OK, although the May election is likely to be a big issue. However, the Australian economy could really go either way in 2015.
While consensus among economists is 2.8% growth in 2015 and 2.4% inflation, the range is fairly wide. In terms of growth, Barclays see the economy averaging 3.5% growth, while Morgan Stanley 1.9%. On inflation Nomura are the most hawkish, looking for inflation of 2.9% in Q2, while Morgan Stanley look for a move below 2%.
Naturally, Australia’s terms of trade will continue to be in play and while volumes have been high, there is now doubt that the real effective exchange rate needs some serious catch up. Certainly the techincals don’t paint a positive picture and a move through 80c next year looks achieveable.