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AUD: The forgotten cyclical - ANZ

According to Giulia Specchia, Research Analyst at ANZ, the AUD’s recent underperformance is down to spread shrinkage, so they think further downside from this is limited.

Key Quotes

“Global tailwinds, plus strong growth and abundant liquidity boosting sentiment, should provide some upside.”

“The AUD has been the weakest performing G10 currency of late, driven by the collapsing yield differential between Australia and the US that followed disappointing wage and inflation data.”

“At current levels, however, we expect any downside from yields to be limited. Business sentiment is at an all-time high, growth is solid and the unemployment rate is on a downward trend.”

“So the RBA should be comfortable that inflation will lift in coming quarters. This should provide a floor to the AUD. Also, while the Fed market pricing for next year is conservative, investors will probably remain cautious about pricing more in. Indeed, the Fed seems to be losing confidence in the inflation outlook, with several officials advocating a slower path to hikes.”

“While commodity prices are unlikely to provide momentum, other factors, such as risk sentiment and liquidity, will be crucial. The level of growth and abundant liquidity mean risk appetite will be well supported and should provide fresh buying opportunities for cyclical risk assets like the AUD.”

“Notably, the AUD’s performance against other broader-risk betas and against the liquidity expansion of H2 2017 has been atypical, with it drastically underperforming risk. We don’t think this is likely to continue, and see the potential for a correction higher of the residual undervaluation.”

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