Will The RBA Push Back Against AUD Strength? - Morgan Stanley

With AUDUSD trading over 0.76, it was just over a year ago when the RBA surprised markets with a rate cut due to AUD strength (then trading around 0.78).

This time the currency has been rallying because iron ore, Australia's major export, has rallied around 4% in the past month and 43% from the bottom in December. The set-up is different to February 2015 when the RBA was faced with over a 10% decline in iron ore in the preceding month and weakness in China's PMI.

In addition to commodity prices, stronger-than-expected Australian GDP in 4Q (3%Y) and stabilisation of Chinese data all support the RBA not pushing back against AUD strength.

If anything should worry the RBA it is the lowering of an inflation expectations survey overnight to 1.7% from 2.1% rather than any weakness in retail sales (0%M versus 0.4%M expected), but the data should support a dovish tone without a rate cut.

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Our economists are now seeing risks that the next rate cut be delayed until later on in the year due to political uncertainties. The federal budget has been brought forward to May 3 and a potential early election on July 2 may cause the central bank to delay rate cuts until it has more information about the fiscal environment.

We continue to promote trading long AUDJPY, which is just shy of breaking through its 200DMA at 86.50. Above 87.40 the pair would also break out of the trend channel since November 2014.