ANZ suggest clients to take a tactical long trade on AUDNZD. They report “with the AUD/USD trading closer to fair value and near its 2014 lows further downside requires some shift in fundamentals to provide the impetus for a
Currently the signals that we are receiving are somewhat mixed. Domestic dynamics are neutral, while those in China are becoming more positive. In the near-term, a sparse US data calendar means that the USD (the likely catalyst of the downside break in the AUD) is going to be range-bound, awaiting a catalyst to resume its appreciation. Domestic dynamics are neutral as the RBA remains on hold, and the economy remains relatively stable at below trend levels. This was borne out in the recent RBA minutes where the bank repeated the phrase that “the most prudent course was likely to be a period of stability in interest rates”.
On the other-hand, in China, there is some evidence that we are nearing a trough for growth:
• Septembers IP report showed stabilisation;
• Commodities have found a near-term base and
steel prices are rising again;
• Property sales volumes picked up during the
• Interest rates are falling, possibly indicating that
credit easing is finally working its way through the
• PMIs are highlighting that the external pulse is also
improving with export orders series rising.
In the near-term this could provide some upside for the AUD – though we caution that this will be a tactical shift, rather than a true fundamental shift. Recently there has been a significant short-term relationship between the AUD and commodity prices and so any recovery in China is likely to have an impact on the AUD. We still think that the broad trend for the Chinese economy is towards a less credit driven, lower investment intensity structure, which will have lower multipliers. This is highlighted by the relationship between the China economic surprise index and the AUD. It shows that, while a directional relationship remains, and some upside should be expected on a China recovery, the beta is lower than it was.
However, the beta is still positive and upside is likely if, as we expect, the Chinese economy has found a near-term base.
We think that this AUD rally is tactical, rather than strategic. Using the end of 2013/early 2014 as a blueprint, we think strength should not be extrapolated too far. In that instance we saw liquidity selectively injected into the system, yields then fell, and growth stabilised. The authorities then tightened liquidity again. The same pattern is likely to play out again this time, with stabilisation as the primary policy goal. When this is achieved, broader structural goals are likely to dominate, and liquidity will once again be restricted.
However, like in March, positioning is short and expectations are low and as such a tactical opportunity exists for the AUD. This is best expressed through buying AUD/NZD at 1.1015, with a stop just below the 200DMA at 1.0850, and an initial target at the high of 1.13“.