Australian Dollar Outlook

1 - 3 Month Outlook 

As in September, October was essentially a month of range-trading with a positive bias in AUD. November has started with a similar tone after the RBA disappointed a growing number of analysts looking for a cut and kept rates unchanged at its November 3 meeting. Beyond the rate decision itself, the statement suggested the hurdle for lower rates remains high and the RBA's default position is to keep rates unchanged unless a shift in the data makes the case for a cut. That case is unlikely to be made by the December meeting and the risk is another brief squeeze higher around that time, with markets still pricing in a high risk of a cut. 

The RBA has, to a degree, shrugged off the out-of-cycle hikes in commercial lenders' mortgage rates, suggesting that "overall conditions are still quite accommodative." Looking further forward, the hurdle for lower rates will be cleared in early 2016. The economists remain of the view that this easing cycle is not about inflation (as is the case with some other central banks) but rather activity. Given the ongoing adjustment lower in mining capex, the terms of trade, and national income, they do not share the RBA's optimism on growth and so expect rates to fall in Q1, and again in Q2 and a negative stance is maintained on AUD as a result. 

6 - 12 Month Outlook 

As we head into 2016, further AUD weakness is expected backed by further cuts from the RBA. That is currently only partially discounted by the market. In an environment of slowing global trade, countries most dependent on the external sector/least able to rely on domestic demand are likely to underperform. AU is a risk in that regard. Although difficult to incorporate in central forecasts, the growing risk of a major El Nino event is a significant downside risk to economic activity in Australia and to AUD, particularly against CAD (which would probably be a net beneficiary). 

"We look for CNY depreciation to extend to 6.95 and AUD should be a relative underperformer if we are right, given the size of its trade exposure to China", says RBC Capital Markets.