ANZ on AUD: What it'll take for a range break on AUD

From ANZ"s weekly "FX Insight"

The bank says its "unusual times" for the AUD

• fundamental drivers of the AUD have diverged


• Since mid-2016,Australian-US front end rate differentials have narrowed, while at the same time commodity prices have bounced


• This divergence is rare

The divergence is keeping the AUD in a tight range. What will it take to break the currency out of the range?

• would require either a shift to a tightening bias from the RBA or an "image uplift" for the AUD

But:

• Neither scenario seems likely

Firstly, our commodities team expects commodity prices to broadly consolidate as excess capacity in the Chinese steel and coal sectors continues to be removed

• The recent spike in coking coal prices is likely to be temporary and prices are expected to retrace to recent lows by the end of the year.


• Meanwhile, the iron ore price is forecast to trade in a USD70-80 per tonne range for the remainder of the year.

Secondly, Australia looks to be the laggard in the current global rates cycle, which should see rate differentials continue to narrow.

• The RBA looks firmly on hold at a time when a number of major central banks globally(such as the Fed, ECB, and BoE) are sounding more confident.
  

Finally, ANZ do outline one other factor which could drive a break:

An alternate route to a higher AUD, which occurs despite this unusual paradigm persisting, is that something else drives a re-rating of the AUD which does not impact on rates pricing.

Currently, there is a large discount priced into the AUD relative to other global beta assets. This is reflected in our risk premium, which has turned sharply negative in recent months

Here too, however, a catalyst for a shift is difficult to identify in the near term

ANZ on AUD: What it"ll take for a range break on AUD
ANZ on AUD: What it"ll take for a range break on AUD
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