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AUD/USD limited downside? – Westpac

FXStreet (Edinburgh) - Robert Rennie, Analyst at Wetspac, remarks that the Fed’s hiking cycle does not necessarily mean a weaker exchange rate.

Key Quotes

“Two weeks ago, I presented the rather unpopular argument that the A$ need not necessarily fall in the face of a stronger US$. Two weeks later the US$ (broad effective) index is close to 4 year highs while the RBA A$ effective index is up 4.5% so far this year”.

“In my view, it would take a material event such as a further rapid fall in commodity markets, a surprise rate cut from the RBA, aggressive currency intervention from the RBA, a rapid depreciation of a key funding currency such as the ¥ or a more aggressive tightening cycle/ withdrawal of balance sheet by the Fed than currently predicted to break this cycle and knock the A$ sharply lower”.

“Now that is not to say the Australian economy does not need a lower currency - clearly it does”.

“There seems very little doubt that the RBA is correct here - the A$ "remains above most estimates of its fundamental value" and if anything that fundamental value continues to fall”.

“However, the point here is not whether a lower currency is justified, but whether a lower A$ is likely and how this will eventuate. My sense remains that the A$ is a highly attractive currency, both in an absolute AAA sense and a relative yield sense, and one that remains driven by global liquidity”.

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