Jarratt Davis

Special Consultant to the FPA
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Our bias for the Australian dollar is currently weakly bullish in the context of RBA being on hold and CPI, employment and GDP all showing either benign or positive signs for the Australian economy. Further, the low AUD exchange rate is helping the economy survive the low price of commodities, namely iron ore and copper. It is important to note that recent global uncertainty, along with the continued rout in the commodities markets have put extra pressure on the AUD and further slowdown in China present downside risk to the Australian dollar.

AUD Analysis

Interest Rate

Official Cash Rate: 2.00%

Last Change: May 6, 2015 (2.25%)

Expected Future Change: No Change

Next release: April 4

Inflation

Inflation Target: 2-3%

Period: 2015

CPI: 1.7% Prior: 1.5%

Trimmed Mean CPI: 2.1% Prior: 2.1%

Next Release: April 27

Employment

Period: February

Employment Change: 300 Expected: 10,000

Unemployment Rate: 5.8% Expected: 6.0%

Next Release: April 14

Growth

Period: 2015

GDP: 3.0% Expected: 2.5%

Next Release: May 31

The AUD rallied during February and March as the market saw the RBA likely to stay on hold for the foreseeable future after the statement made no new dovish comments and fourth quarter GDP smashed estimates at 3% y/y vs 2.5% expected. In the context of so many central banks with an easing bias, the neutral AUD has become a comparatively bullish currency.

The Reserve Bank of Australia kept rates on hold at 2% at February 29 as was expected. The statement was largely a reiteration of the prior statement. Committee members observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The statement confirmed current interest rates are appropriate but “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”

Inflation for the fourth quarter of 2015 was steady at 1.7% for the headline and 2.1% for the Trimmed Mean. The RBA prefers to focus on the latter in times of oil price volatility and the measure indicates underlying inflation is within the Bank’s target range albeit at the lower. This afforded the RBA some dovish rhetoric in the February statement, proving their readiness to ease if necessary.

Employment for February missed on the headline change with only 300 jobs added vs 10,000 expected. However, nearly 16,000 full-time jobs were added and the unemployment rate dropped to 5.8%, below expected 6.0%. This was supportive of the Aussie, especially against the USD which was hit by the dovish FOMC. Aussie rallied to its highest level since July 2015, up over 850 pips from its January lows and approaching the .77 handle.

The March rally was also helped by an imminent OPEC and non-OPEC meeting which boosted WTI above $40 per barrel and helped lift all commodity-linked currencies.

Gross domestic product for the fourth quarter beat expectations at 0.6% for the quarter, with expectations of 0.5%. Year-on-year growth for 2015 was at a healthy 3.0% versus estimates of 2.5%. The beat on expectations was supportive of the AUD, with solid growth diminishing chances of easing in coming months.

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