AUD: Falling Growth Raises Downside Risks - ANZ
Research Team at ANZ, estimates that the Australia’s potential growth is closer to 2.5% than the 3% that was commonly sighted previously.
"While in the near term this has few implications for the AUD, over the medium term the impact is large.
If potential growth has indeed fallen, it means that the neutral cash rate is also lower. For the AUD this raises downside risks in two ways. First, it means that in the near term cash rates are not as stimulatory as we previously thought, and as such the risk of further easing remains. While second, in the longer term, it means that the overall rate structure in Australia will be lower, and as such Australian rates will continue to converge on global rates.
The AUD has rallied this week in line with fundamentals. The improvement was driven by both a shift in front end rates and the stabilisation in commodity prices. This means that the recent move is justified in the short term. That said, the AUD continues to move in an exaggerated fashion and this means that a still-wide risk premium leaves the AUD very vulnerable to any negative surprises.
In the near term, the lack of momentum accounts in the AUD backs up the idea that the recent AUD move has been driven by a perception of a fundamental shift, and likely means that the recent move could be sustained – particularly if the Fed sounds dovish next week.
Interest rates have started to decline as a driver of the AUD, though AUD short end rates remain critical. Looking ahead, US rates are likely to rise in importance again, while commodities are becoming a rising influence.”