Tomorrow morning, the Reserve Bank of Australia’s cash rate is set to remain on hold at 1.5% despite the Aussie is on a bullish trend since mid-May. The Aussie can be traded at almost $0.80. It is worth noting that the Australian currency has gained more than 11% this year.
We believe that it is likely that the Aussie breaks above $0.80 given global fundamentals. In particular, the greenback keeps on getting weaker (Trump’s inability to deliver and Fed back towards patience). China’s growth (Australian main trade partner) is better and has known a third positive quarter in a row.
Earlier this month, the RBA mentioned that “a strengthening exchange rate” would definitely render difficult the central bank’s mission as Australia relies mostly on exports (iron ore). Australia’s GDP target of 2.25% for June 2019 looks nonetheless difficult to attain. Right now, the GDP lies at 1.7% y/y and the continue rise of the Australian dollar would likely force the RBA to slash their forecasts.
We do not believe the AUD strengthening is sustainable over the medium-term even though it implies higher commodity prices but exports and other sectors of the Australian economy could suffer. A pullback is now getting more likely.
By Yann Quelenn