The Decline in the Australian Dollar has Further to Run: Deutsche Bank
- Written by: Gary Howes
Content provided by eFXnews.
Why the decline in the Australian to US dollar exchange rate is likely to extend further. Robin Winkler, Strategist at Deutsche Bank, writes:
The recent interest rate cut by the RBA goes beyond risk management. It marks a shift in the near-term target from unemployment to inflation.
Given stagnant wage growth, the exchange rate will need to do the grunt work in getting core inflation from 1.5% back above 2%.
We estimate that the RBA needs a 10% depreciation just to stabilise core inflation into 2017; a return above 2% will likely take more.
With only 21bps of further easing priced, we continue to think that the market likely underestimates the magnitude of the fundamental adjustment ahead.
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Hence, the RBA needs significant further depreciation even just to maintain the current inflation boost from past currency movements.
A simulated one-off depreciation of 10% would just about do the job.
To get to 2%, the RBA would need to rely on other factors such as wage growth, which however has proven insensitive to monetary stimulus in Australia, as in other developed economies.
The RBA is therefore likely to need more than a 10% depreciation, consistent with AUD/USD in the low 0.60s.
It’s not too late to go short in our view.