For AUD, rate firmness seems strengthening, but in 2016 it will be driven by Fed hikes rather than RBA easing (we think the RBA is done).
- AUD jumped to 7 and half month's highs of 0.7508 levels after various significant economic data shows progress.
- Aussie GDP on QoQ basis has managed to flash an upbeat numbers at 0.6% versus forecasts at 0.5%.
- Trade deficit is contracted from 3.52M to 2.94M on monthly terms.
- While capex have hinted good business prospects by flashing a positive 0.8%, an increase from previous -8.4%.The Australian Bureau of Statistics reported that the CPI rose 1.7% through the year to the December quarter 2015 from 1.5% in the previous quarter. It is the highest figure since Q4' 2014 and slightly above market consensus, this upbeat expectation of 1.7%, boosting Aussie dollar to show little strength against USD.
- RBA stood pat with cash rate at 2.00%.
Long term projection:
Over the longer-term, we expect AU growth to remain subpar and AUD to drift lower. There are a few key things to watch in 2016. Governor Stevens retires in Sept 2016 while a federal election must be held by Jan 2017.
The next AUD's significance lies in AU's current account deficit. While historically it has been easily financed thanks to Australia's high interest rates, it is back to 4.7%/GDP.
We reckon that the purchase power of AUD is boosted by the CPI and nothing else and changes in purchasing trends brought a high reading that is viewed as positive for the AUD but would this be sustainable is concerning part.
On the contrary, the greatest difference has been the terms of trade, which we think is bottoming as iron ore prices move within a range and LNG exports rise, thus insulating the trade balance from higher oil prices next year. AUD/USD is forecasted around 0.68 in Q2, approximately at 0.72 by Q4 end.
