A piece from Westpac strategist Robert Rennie is reported in the Australian press today (Australian Financial Review. for example).
Rennie discusses "what will it take for AUD to break below 0.70?"
- I conclude I see rising risks of dips towards 0.70 before year end
- I argue there are factors that will make such a move sticky and slow in nature
Says Westpac's fair value model puts AUD/USD around 0.73-0.75
To get below 0.70, he says he would need to see:
- our export weighted commodity index about 10% lower
- the Fed deliver 25bps in Sep and Dec
- a range of risk aversion measures above the recent highs
- a return to the kind of aggressive short speculative position seen late 2013/ early 2014
On these:
- Expects export commodity prices to be approximately 8/10% lower in Q4 (against levels seen early July)
- Westpac is forecasting the Federal Reserve to hike rates twice before the end of the year
- That would arguably see an increase on measures of volatility and heightened risk aversion plus a likely rise in speculative short A$ positions in FX markets
- Thus, we would argue that the risks of seeing AUD sub 0.70 for a period are higher than consensus might acknowledge
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On what might stop AUD breaking below 0.70?
- With aggressive ECB and BoJ QE continuing through this year into next and yields in Australia remaining 'high', this should continue to generate solid demand for the A$ on dips
- A good example of this would be the close to record demand seen for A$ assets in Feb of this year from Japanese investors when AUD/JPY dipped below 90.