Westpac's update of their Australian dollar view begins with a brief and helpful summary of the various influences on its rate:
- US inflation at 7% and unemployment at 4% have markets pricing a risk of a 50bp Fed hike in March. This should underpin the US dollar despite occasional wobbles, helping cap AUD/USD rallies around 0.72.
- While 10yr AU-US yields spreads are range-bound, the 2yr continues to trend in the US dollar’s favour.
- The February RBA meeting was in line with our view for the first rate rise to be delivered in August, as it wrapped up QE and welcomed the fall in unemployment but reserved judgement on the sustainability of the rise in core inflation.
- commodity price support has strengthened (RBA commodity index + 31% y/y in January, following 4 years of monthly trade surpluses)
- A strong US dollar, somewhat dovish RBA and skittish equities suggest multi-week risks for a return to the 0.69 handle or (briefly) lower, but the Aussie should be on more solid footing in Q2.
