By Roger J Kerr
The very short-term focus for NZD/USD direction is Chinese economic data today and the RBA’s OCR review tomorrow and what both outcomes mean for near-term AUD/USD movement.
The AUD has been sold down to 0.9100 against the USD ahead of the Chinese Performance of Manufacturing data on the expectation that the PMI Index will print below 50.0.
Comments over the weekend from Chinese President Xi Jinping that Chinese regional GDP growth is not the be all and end all has been taken up by the financial markets that China is softening its attitude on GDP growth targets. No point in regions of China producing more steel to meet their regional GDP growth targets if there are stockpiles of steel elsewhere.
The comments are of course negative for the AUD that is inextricably linked to Chinese demand for metal and mining resources.
It is difficult to estimate where and when the AUD will find some support from the selling rout over recent weeks.
It has come a long way from $1.0500 to 0.9100 and all the global investors, hedge funds and currency speculators that wanted to get out of Aussie dollars on the USD strengthening (from QE tapering) must have exited by now.
For the AUD to stabilise it needs commodity prices stabilising on stable (not weakening) Chinese economic data and the RBA favouring no further interest rate cuts at this time.
The Australian moneymarkets are pricing in another 0.40% of OCR cuts, however my view is that the RBA will point to the now much lower AUD currency value and conclude that further interest rate reductions are not warranted at this time.
Political changes in Australia over coming weeks and are not likely to change economic policy settings and the FX markets have already priced in a change of Government.
When the AUD/USD exchange rate was above $1.0000 to the USD from the start of 2012 it was seriously over-valued and out of whack with their falling terms of trade (export/import prices).
Now the currency has spectacularly depreciated to 0.9100 it is right back in line with the lower Terms of Trade Index (see chart below).
On the assumption that the RBA leave their interest rates unchanged this week, the AUD/USD rate should bounce back to the 0.9300 to 0.9500 range.
Short-term, this will bring the Kiwi dollar back up to the 0.7900 to 0.8100 region.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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