AUD: Cautious outlook? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that over the past 5 trading session, the AUD’s losses have only been outstripped by those in GBP within the G10 universe.  

Key Quotes

“Strong world growth generally bodes well for demand for energy, metals and food.  Commodities such as oil and iron ore, however, have had a difficult year.  This has resulted in pressure on the G10 commodity currencies.”

“For iron ore which, along with coal, is Australia’s largest export product, last year’s upswing has given way to a harsh correction.  Measured from their February high, prices have dived by around 37%.  Part of the story behind the iron ore plunge is related to China. The nation consumes almost three-quarters of the world’s sea-borne ore and last week stockpiles in China were reported to have shifted ever higher with port holdings reported to be at record highs.  This news comes at a time when China is expected to increase its use of scrap steel and when the need to reign in credit creation has led to speculation that the housing market, and demand for building materials, could slow.”

“The RBA appears to be keeping a close eye on China. The minutes of the RBA’s May policy meeting contained the warnings that “the outlook for the Chinese economy, particularly the residential property market, was an ongoing source of uncertainty for Australian exports and the terms of trade.  Another source of uncertainty was how the Chinese authorities might balance achieving their growth targets with the risks associated with high and rising leverage in the Chinese economy”.”

“In its May policy meeting the RBA already conceded “that it could be some time before a stronger and more broadly based pick-up in non-mining business investment growth occurs”.  Policymakers also noted last month there had been a moderation in domestic consumption growth and a slight increase in the unemployment rate.  Despite acknowledging the positive outlook for world growth a cautious tone was clearly evident.  We would expect these sentiments to remain in place at the RBA’s June 6 policy meeting.  We expect AUD/USD to slip towards 0.73 by year end.”