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AUD: Lot of bad news already priced in - NAB

FXStreet (Delhi) – Research Team at NAB, suggests that AUD’s sustenance above 0.70 suggests a lot of bad news is already in the price but retest of September lows likely requires fresh pick-up in volatility, a still stronger USD and/or weaker CNY – none of which are assured.

Key Quotes

“The surprise to many has been that the Aussie has not broken back down through 70 cents at a time when: 1. Rising confidence in December Fed rates ‘lift-off’ has generally been supporting the big dollar; 2. Key Australian commodity prices have come under fresh downward pressure, including iron ore revisiting its early July cycle (9 year) lows; 3. Market volatility has been rising (e.g. VIX from below 15 to above 20 in the aftermath of the Paris terrorist attacks).”

“Our main observation here is that since the speculative market is already very short AUD judging from IMM positioning data a lot of bad news for the currency already looks to be in the price.”

“A renewed breakdown in AUD back towards the 7 September lows (0.6896) likely requires current a renewed surge in market volatility. In this respect, we’d judge that even if the upcoming (16 December) FOMC meeting delivers the most well flagged Fed tightening in history, market volatility could still rise in its wake.”

“Another risk - via the traditional tight Asia EM FX link to AUD - is renewed downward pressure on the renminbi (already in evidence in recent days) and which the PBoC chooses to countenance rather than resist.”

“We’ve held a year-end forecast for AUD at 0.70 since mid-August (when we lowered it from 0.72) and don’t feel compelled to change it at present. We’d assess there to be about as much chance of ending the year above 0.70 as below.”

“The downside risk comes from either the aforementioned volatility spike or a still-stronger US dollar out of the December FOMC; upside risks come from volatility levels falling not rising out of upcoming Fed (and ECB) meeting outcomes and the US dollar potentially falling following the FOMC, having been bid in front of it.”

“Any further reduction in RBA easing expectations would also support higher AUD level, though with only some 15bps of easing now over the coming year, upside for the currency on
this factor alone is very limited.”

“While the upcoming Fed and ECB policy meeting outcomes will be holding market in their thrall in the coming days and weeks, we do have the Q3 GDP print (3 Dec) and last RBA rates pronouncement for the year (2 Dec) to look forward to. Ahead of the RBA (no change expected) Governor Stevens speaks this Tuesday. If he remains relatively upbeat, and GDP prints near our current expectations for 0.8%, the AUD won’t come to any y hard at all.”

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