CBA on the Australian dollar, technical support and outllok:

While we see further near-term downside in AUD/USD, and believe AUD/USD could decline and test the technical support around 0.7473, we are not yet getting bearish AUD. and we don't believe it is headed significantly lower for five main reasons:

  1. Australia's terms of trade is 54% higher today than it was in March 2001
  2. The world economy is accelerating with broad-based growth of around 3.4%, rather than decelerating as it was in 2001, as the global effects of the dot corn U.S. recession persisted, generating downward revisions to global GDP growth, and lowering commodity prices
  3. Asia's economy is not recovering from the 1997-98 Asia crisis as well as running a regional current account deficit, like it was in 2001. And the widely-observed index of Asian currencies (ADXY index) is today 15% higher today compared to 2001. Furthermore, Asia's regional economy is currently running a current account surplus
  4. Australia's current account deficit is today relatively small at only 2.1% of GDP, as opposed to an average of 4.3% over the two-years leading up to March 2001. Which means AUD/USD is somewhat less sensitive to interest rate differentials, and AUD retains a higher valuation than in 2001
  5. Australia's economy is growing well, and on-track to expand at around 3.0% over the next year, with the unemployment rate remaining on a downward trend. Later today, we get an update of the Australian labour market with the release of the October numbers.

We see downside risks to our recently-released currency forecasts as the USD retains strength on the prospect of a cut in the U.S. corporate tax rate passing Congress before year-end, upside U.S. inflation pressures that may cause the Fed to lift interest rates more than the market is currently anticipating. At the same time. lower than expected Australian wage growth risks generating lower-for-longer Australian inflation, and delaying the RBA from raising interest rates well into 2019. Furthermore, the current financial market indicators of a flattening U.S. yield curve and downturn in high yield credit spreads are generating some nervousness in global equity markets, and are likely to weigh on AUD/USD in the near-term. AUD/USD remains vulnerable to more near-term downside.