Buy the Australian Dollar if it Closes Above 0.70 this Week says Societe Generale 

Image © Desiree Caplas, Adobe Stock

- AUDUSD is a buy if it can hold above 0.70 level this week says Soc Gen.

- Weak inflation not unique to AU, economic slowdown not accelerating.

- Commerzbank says AUDUSD to remain offered while below 0.7108 level.

The Australian Dollar was lifted overnight by official data that revealed a further improvement in Australia's terms of trade that has lifted the fundamental value of the Antipodean currency, which Societe Generale has said is a buy if it can close above the 0.70 level against the U.S. Dollar this week. 

Australian import prices fell by 0.5% during the first-quarter, the Australian Bureau of Statistics said Friday. while export prices increased by a solid 4.5%. This is an improvement from the previous quarter when export prices rose 4.4% and import prices increased 0.5%. 

That means Australia's terms of trade, which is a ratio of export prices over import prices that impacts the fundamental value of a currency, improved last quarter and may have helped lift the currency into the Friday session. 

"The rest of the world is paying Australia a lot more for its exports, particularly for key commodities, a trend that extended into 2019," says Andrew Hanlan, an economist at Westpac. "As a result, the terms of trade for goods strengthened by 5.0% in the opening quarter of 2019. That has the terms of trade for goods 10% above a year ago, almost 40% above the low of 3 years ago and at a seven year high."

Above: Australian Dollar performance on Friday.

What happens next with the Australian Dollar over the course of Friday will be key to the outlook for the currency in the short-term at least, according to Societe Generale's chief FX strategist, whose said that if the Aussie closes above 0.70 Friday then it could be worth buying.

"AUD/USD has fallen right back to the bottom of its range, but if AUD/USD 0.70 holds through tomorrow, it's worth buying," says Kit Juckes, chief FX strategist at Societe Generale. 

Australia's Dollar was hobbled this week when first-quarter inflation figures came in substantially below expectations, leading the market to bet that Reserve Bank of Australia (RBA) interest rate cuts could come sooner than previously thought. 

Financial markets are now betting the RBA will cut rates twice this year, with the first cut coming as soon as May and almost certainly by June. This dealt a blow to the Aussie but financial markets have now priced-in all of the rate cuts they are likely to get, which could mean the pain is over for the Antipodean currency. 

The market-implied RBA cash rate for May 07 fell to 1.33% on Wednesday in the wake of the inflation data, substantially beneath the current 1.5% rate, while the December 03 rate declined to just 1%. The Reserve Bank is due to announce its next policy decision in two week's time on May 07.

Juckes gave no other reasons on Thursday for his call to buy the Aussie but made a similar recommendation on Wednesday after having addressed what the first-quarter inflation figures might mean for the RBA and Australian Dollar outlooks. 

"The market is now pricing in one than one rate cut this year. I think shorts in EUR/AUD are worth persisting with, however. Absence of inflation isn't limited to Australia and the economy isn't showing signs of accelerated weakening," the strategist writes, in a note to clients. 

Above: AUD/USD and 10-year AU-US real-yield differential. Source: Societe Generale.

Technical analysis of the AUD/USD rate from Commerzbank provides more colour on the various factors that might influence trading of the Aussie ahead of the RBA's next interest rate meeting and decision. 

"AUD/USD has recently eroded the 2019 uptrend and sold off towards the .7004 March low. Failure here will trigger a deeper sell off to the .6950 61.8% retracement. Below .6950 there is scope for the .6857/78.6% retracement. Rallies will now find initial resistance offered by the 55 day moving average at .7108 and the market will stay directly offered below here," says Karen Jones, head of technical analysis at Commerzbank. 

If the Australian Dollar achieves a weekly close above the 0.70 level then it could provide the exchange rate with a brief period of respite which, according to Jones' analysis, would need to see it rise above the 0.7108 threshold in order to alleviate the downside pressure on the market. 

Ultimately though, the outlook beyond the coming days will be determined in large part by developments on the  economic and interest rate fields in Australia and the U.S., as well as elsewhere. 

Interest rate decisions are normally only made in relation to the inflation outlook but impact currencies because of the influence they have over capital flows and the opportunity they provide short-term speculators. 

Above: AUD/USD rate shown at 4-hour intervals.

"The CPI miss drove a tremendous sell-off yesterday and we are perched back at the pivotal 0.7000 level in AUDUSD – an RBA cut already on May 7 may be too aggressive a move to expect, but at least a strong set-up guidance at that meeting for a cut at the following meeting likely," says John Hardy, chief FX strategist at Saxo Bank. 

Hardy is sceptical of whether a rate cut will actually come next month and, given how the market is positioned, it's not clear that even the most 'dovish' talk of future cuts will be enough for the RBA e to force the Antipodean currency lower again. 

Australia's annual inflation rate fell to just 1.3% in the recent quarter, down from 1.8% previously, while the core rate declined from 1.7% to 1.6%. The RBA is obliged to use interest rate policy to ensure inflation remains around 2% or more, but the Aussie rate has been below that level for a number of years now.  

Rate setters need either faster wage growth for households, which requires more jobs and lower unemployment, or they need faster economic growth in order to get the consumer price index back to target.

Above: AUD/USD rate shown at daily intervals.

 

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