The net exports of Australia added 1.5%pts to headline growth, but at least in part that was an unwind of Q2 weather-related weakness. There is limited evidence of a boom in non-resource exports or business investment, which would inspire more confidence that growth is actually rebalancing in response to lower rates/AUD. Service exports have picked up but they still account for just 15% of total exports. Goods exports are still dominated by resources.

In real terms, export volumes may rise - in fact our energy team project AU will be the world's number one exporter of LNG by 2018. But the terms of trade shock mean national income is lower (and consumption suffers as a result).

While, Aussie inflation figures during Q3 was remarkably fragile at 0.1% QoQ in seasonally adjusted terms, and at 0.4% and annualized rate.

But CPI in Q4 is likely to be marginally higher than previous, with forecasts 0.3% and annualized gain of just 1.5%, which will still be lower than the Reserve Bank of Australia's target range of 2%-3%.  

AUD/USD is still stuck in its 0.70/0.74 range, mirroring the lack of direction in front-end AU-US rate spreads. We think the spread could narrow from both sides over the next 3m, pushing AUD/USD lower. Our official forecast calls for two more cuts from the RBA in H1 2016 though there is a higher risk now that those cuts are delayed. Recent data have been very positive (our AU economic surprise indicator maxed out at +100 for a couple of weeks, i.e. all the data we track were beating expectations).

AUDUSD has dropped from the high of 0.7064 up to 0.6918 and still have more downside potential as per the OTC market sentiments, with the current levels of 0.6940 one can build hedging strategy to mitigate downside risks contemplating above IVs and risk reversal computations. We would come up with hedging arrangements for AUDUSD in upcoming posts.

In fact, while CAD has been hit on the latest leg down in oil, Australia's terms of trade are deteriorating almost as rapidly. We think that should eventually drive AUD/CAD lower and are watching for a break of the current uptrend.