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CURRENCY ANALYSIS

AUD -  Australian Dollar

AUD, Australian Dollar, RBNZ, Currency Analysis, fx trader, forex

RBA slightly more positive at its first meeting of the new year. Upward revision for the AUD.

In line with the overall trend, the Australian dollar also opened 2017 on the climb, almost entirely making the ground lost in the wake of Trump’s victory, and returning from AUD/USD 0.71 to 0.76. The start of the year was positive against the euro as well, with the AUD rising to new highs, last recorded in 2015, at EUR/AUD 1.38 from 1.44. The stronger performance against the euro (although the single currency also started the year on the rise against the US dollar) was achieved on the positive trend of commodity prices, which began a year ago and is ongoing. All considered, however, the Australian dollar’s strong start to the year is also mostly a consequence of the widespread correction of the US dollar.

At its first meeting of the year (7 February), the Reserve Bank of Australia left rates unchanged at 1.50% - as unanimously expected – and made a slightly brighter assessment of economic scenario at both the global and domestic levels compared to December. According to the RBA, global economic conditions have improved in the past few months, inflation is generally rising back moderately, and following the rate hike in the United States, “there is no longer an expectation of further monetary easing in other major economies”, a conclusion which should implicitly apply to the RBA as well.

For what concerns the domestic economy, the RBA, while noting that growth contracted more than expected in 3Q 2016, explained that this was due to temporary factors, and therefore expects a recovery starting already in 4Q (data will be released on 1st March). As a result of the downward revision of the 3Q reading, the RBA also revised down forecast growth for this year, from 2½-3½% to 2-3%, while leaving unchanged its estimate for 2018, on the climb to 2½-3½%, and prospecting a further strengthening in 2019.

1) Two changes have been made to the domestic scenario – that has improved compared to December:

 The RBA reasserted that the further increase in commodity prices (Fig. 2) is growth-supportive, but this time it did not add that, despite the increase, prices are much lower than they have been in the past few years, indicating that it now probably believes the uptrend is consolidating;

 For the first time, the RBA said that “the period of declining mining investment is coming to an end”, indicating that following the mining sector boom, the economy has managed to rebalance, receiving stronger support from growth in the non-mining sector.

2) For what concerns inflation, forecasts have been left unchanged at 1½-2½% for both this year and the next, and a full return to target (2-3%) is expected in 2019, although in this case there has been a positive development compared to the last we months. The Governor of the RBA, Philip Lowe, said that the inflation target is flexible, i.e. achieving an inflation rate of exactly 2.5% as soon as possible should not be viewed as an objective.

3) There was also a further positive development, on the assessment of the exchange rate. While the RBA statement reasserts that an appreciation of the exchange rate would complicate the transition process of the domestic economy after the waning of the sector boom, during the press conference Lowe said that in any case it is hard to tell whether the Australian dollar is “too strong”, given the outlook for growth, which is positive. This supports the assumption that we have been embracing for several months now, based on which the RBA does not consider necessary that the exchange rate depreciate, and consider sufficient its non-appreciation, implicitly indicating that at current levels the Australian dollar is not – if not only marginally – overvalued.

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