Australian Dollar: Dose of Poor Data Opens the Door to RBA Intervention and a Softer March

The Reserve Bank of Australia has proven supportive to the Aussie dollar for some months now by expressing confidence in the economy. Could that be about to change on the back of today's data releases?

February looks set to end on a sour note for the Australian currency.

The Australian dollar is down against the pound, euro and US dollar on news that data on profits, inventories and wages came in below expectations and sowed doubt into the positive sentiment we have seen the Aussie enjoy this month.

(This data is discussed towards the bottom of the article).

The Australian dollar had a strong February with sentiment towards the currency improving alongside expectations that global commodity markets had seen the worst come to pass.

A benign Australian central bank has also helped with authorities seemingly content with the trajectory being taken by the economy and its currency.

However, the 'soft' support offered to the Australian dollar by the Reserve Bank of Australia (RBA) could be taken away when policy makers meet on Tuesday the 1st of March.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0145▼ -0.08% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.946 - 1.9541
**Independent Specialist	1.9863 - 1.9943 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The RBA have maintained a benign approach with regards to the value of the Australian dollar even as it is now seen as being overvalued.

The RBA’s John Edwards last week indicated that in his opinion the AUD was too richly priced having observed that it had formed a base against the US dollar and in his opinion the base was too high.  

Edwards says he would be more comfortable with AUD/USD trading at 0.65 given the decline in commodity prices.

“We agree, the AUD REER remains overvalued based on our BEER model and hence we have been calling for AUD/USD to bottom at 0.65 by 2Q16,” says Viraj Patel, currency analyst with ING Bank.

ING have told clients to be wary of another break lower in the Australian dollar with the RBA meeting being a potential catalyst.

“A material shift in policy bias would be the catalyst for another leg of AUD/USD downside, note the pair has failed to push below 0.70 this year due to a weaker USD,” says Patel.

Analysts at Swissquote Bank, in Gland Switzerland, are in agreement and, “expect the RBA to reiterate its call for a weaker Aussie at its next meeting on March 1st as Governor Stevens is most likely taking a dim view of the Aussie's recent appreciation.”

Swissquote believe a more proactive approach from the central bank is warranted as they are of the opinion that the economy is losing momentum.

According to the latest report from the Australian Bureau of Statistics released last Thursday, expected annual private capital expenditure fell sharply reaching the lowest level in nine years as Australian non-mining companies cut spending unexpectedly.

The market was broadly expecting a collapse of investment in mining, mostly due to the prospect of low commodity prices and weak demand from China, but hoped that the non-mining sectors would compensate this setback.

“On the bright side, expected investments in manufacturing increased 9.3% for 2016-2017 compared to 2015-2017,” say Swissquote.

On Friday, AUD/USD was trading at around 0.7200 after failing once again to break the 0.7250 resistance area to the upside.

“In our opinion, the AUD/UD is greatly exposed to downside risk as both technical and fundamental analysis suggest a bearish reversal,” say Swissquote.

No Rate Rises Likely say Barclays and Bank of America

In the opinion of analysts at Barclays it would be risky betting against the Australian dollar in anticipation of a more proactive RBA in March.

"We expect the RBA (Tuesday) to be on hold and unlikely to provide any signal of imminent rate action, given that there was no significant deterioration in domestic data and the trade-weighted AUD remains almost unchanged from the previous meeting," say Barclays in a note to clients ahead of the new trading week.

Bank of America Merrill Lynch agree with the 'no change' assumption:

"The question is whether the outlook appears as if it will deteriorate enough for the further easing of policy to be necessary. At this stage we do not think it will."

Bank of America note that data, such as that released on the final day of February, does not materially alter the view that the Aussie economy will likely experience decent GDP growth over the course of the year ahead.

"We think this should come as little surprise given the extraordinary growth experienced in the back-half of 2015. We do not anticipate the RBA will judge global financial market volatility has worsened since the Board last met. And although lower equity prices may negatively impact confidence, lower oil prices and the rebound in iron ore prices will likely be viewed positively," say BofA in a note to clients on Monday the 29th February.

Nevertheless, Barclays do admit there are risks to their view of no imminent change.

"With soft wage growth and the weak January employment print, which raised some concerns about whether momentum is as strong as previously expected, the RBA will likely retain an easing bias, reiterating that “continued low inflation may provide scope for easier policy, should that be appropriate," say strategists.

Wages, Profits and Inventories Data Disappoints

Company profits were weaker than expected in Q4, falling 2.8% q/q, markets had expected the decline to read at 1.8%.

Profits at non-mining firms fell 1.5% q/q, after a flat result in Q3.

Inventories fell 0.4% q/q in Q4, considerably weaker than both our own and market expectations. Markets had set the Australian dollar higher by expecting a reading of 0.2%.

Aggregate wages growth slowed in Q4, which is surprising given the strength in employment.

“This suggests that Q4 non-farm compensation of employees in the national accounts is likely to show only a moderate gain, although there are sometimes significant gaps between the two measures,” says Felicity Emmett at ANZ Research.

Sterling in Strong Recovery

We have seen the GBP/AUD exchange rate bounce at the start of the new week as the pound benefits from a growing fatigue towards the EU referendum - the story has been rinsed for now.

While the outlook for the pair remains biased to the downside we do see the prospect of a short-term correction to establish over coming days.