Despite encouraging Australian growth data, UBS analyst team stays bearish on the AUD and still targets AUD/USD 0.68 on a three-month basis and 0.65 on a six and 12-month basis. They explain how the growth “miracle” looks a little different after scratching the surface.
Key Quotes
“Australia appears to have pulled off a miracle. Recent growth numbers revealed the Australian economy expanded at an above-trend pace of 3% in 2015, a half percentage point more than anticipated by the Reserve Bank of Australia (RBA) in February. The data is impressive at first glance; currency markets pushed the Australian dollar higher by 0.015 to 0.744 against the US dollar.”
“However, the miracle looks a little different after scratching the surface. Almost everything that Australia exports is now being sold for less; its terms of trade fell 3.2% in the quarter to a decade low. This was not entirely unexpected, nor was the weak capex reading. Of greater significance was the government's 2016/17 capex survey showing a 15% decline. Meanwhile, wages growth slowed further, which confirmed other surveys indicating that wages growth is now at an 18-year low. The broadest measure of Australian income growth, real net national disposable income, stayed in 'recessionary' territory. And, worryingly, productivity slowed. There were bright spots - the strength of household consumption for example, which caught most by surprise at 0.8% higher in the quarter. Public demand and government spending also bounced by 1.3%, but both are founded on debt; the saving rate had to decline to its lowest level since the global financial crisis and the government borrowed more to enable this achievement.”
“Plain and simple: Australia's economic miracle is housing based. While prices are likely past the cycle peak, this is not sub-prime. Housing, in our opinion, will contribute less to growth by year-end, but there will be no imminent collapse.”
“That said, Australia's new growth engine, services exports, needs a lower (not higher) Aussie dollar. If the RBA shares our view, we expect them to again become more urgent in their comments regarding the currency and reinforce an easing bias. A rate cut is not our central case, but a live issue. We stay bearish on the AUD and still target AUD/USD 0.68 on a three-month basis and 0.65 on a six and 12-month basis.”
