AUDUSD Analysis and Talking Points
- Soft Australian CPI has increased the probability that the RBA will be on hold in 2019
- Widening rate differentials given the Fed’s tightening path calls for lower Aussie
See our Q3 AUD forecast to learn what will drive the AUD through the quarter.
Soft Australian Economic Fundamentals Calls for RBA Inaction
Overnight saw the release of the latest Australian CPI data for Q2 whereby the headline figure printed at 2.1%, however, underwhelmed expectations of 2.2%. The RBA’s preferred measure of inflation, which is the trimmed mean, rose 1.9%, below the central bank’s target band of 2-3% for a 10th consecutive quarter. Looking closely at the numbers, CPI for market services, which excludes prices controlled by the government, were up 1.1%, implying that core inflation is simply not rising. Consequently, this calls for RBA inaction with markets not fully pricing in a 25bps hike until the beginning of 2020.
Trouble Brewing in Australia’s Housing Market
Australia’s housing market has been one of the nations key drivers of the economy, which has grown for 27yrs without a downturn. Auctions are typically a bellwether of property demand in Australia, however, they have fallen sharply since 2017 and as such this has heightened recessionary risks with investors heavily underweight Australia relative to other regional benchmarks.
RBA Rate Hike Probability
Source: ASX
Widening Rate Differentials Moving in Favour of USD vs. AUD
The RBA’s inaction is in stark contrast to the Federal Reserve who have pointed towards two more rate hikes this year, while 3 rates hikes in 2019 are also pencilled in. Subsequently, this has prompted US yields to surpass Australian bond yields which in turn increases the attractiveness of the USD over the AUD as investors search for yield. 2yr US bond yields are now 63bps more than Australian 2yrs, which is the largest gap since mid-2000. As such, the continued widening of the US-AU bond spread suggests that more losses are on the horizon for AUDUSD.
AUD/USD and Australian-US 2yr Bond Spread Chart
Source: Thomson Reuters
AUDUSD PRICE CHART: Daily Time Frame (January 2018-July 2018)
AUDUSD continues to remain offered, however, a downside record of the 0.7314 (2018 low) is needed in order to spark a broader sell-off in the pair. Upside has been capped by the 55DMA situated at 0.7466, while a break above the range high of 0.7485 would suggest that selling has stalled for now.
Where Next for AUDUSD?
According to IG Client Positioning data shows 59.1% of traders are net-long with the ratio of traders long to short at 1.45 to 1. In fact, traders have remained net-long since Jun 05 when AUDUSD traded near 0.75736; price has moved 1.9% lower since then.
--- Written by Justin McQueen, Market Analyst
To contact Justin, email him at Justin.mcqueen@ig.com
Follow Justin on Twitter @JMcQueenFX
