AUD Still Vulnerable
The Australian dollar struggled through the overnight session, weighed down by lingering concern over how severe the slowdown in China could become. A McCrann article in the Australian press added to the selling pressure, claiming that a cut to the RBA’s cash rate at next Tuesday’s meeting is actually more likely than not. This is not the view of our Australia economists who instead expect the RBA to remain on hold at 4.25% for the rest of this year. The rates market too is skeptical of the claim, but has seen fit to price in 10bp of easing just in case. The official China PMI for March due out on Sunday is also looming large, especially given the weakness of the private-sector flash PMI released last week. We are certainly alert to the near-term risks for AUDUSD, and reiterate our 3m forecast of 1.00. We are however comforted by the fact that Chinese demand for Australia’s main export (iron ore) has not declined and, unlike many other commodities, its spot price is still rising. Our Commodities research team is also constructive on iron ore’s price outlook as their new quarterly forecasts published overnight indicate. Equity markets still look fragile though – something AUD cannot ignore. The Nikkei-225 is down -0.7% at the time of writing, and the Shanghai Composite has sustained similar losses. A further decline in US initial jobless claims today could help turn sentiment around though, especially if our US economists also get the upward revision they expect to US Q4 GDP. Ordinarily the third estimate of a previous quarter’s GDP is not a market-moving affair, but the sterling selloff in the wake of yesterday’s downward revision to UK Q4 GDP (-0.3% q/q) is a reminder that investors remain firmly in data-watch mode, and can punish or reward currencies on the narrowest surprise. Fed Chairman Bernanke will continue his college lecture series today, and speeches are due from Fed Presidents Lacker, Lockhart and Plosser.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank