AUD/USD: Downside limited, even if RBA cuts – MUFG

Analysts at MUFG Bank, see the AUD/USD pair holding around current levels in the near term. Later, they expect it to rise slowly and forecast it will reach 0.70 by the fourth quarter. 

Key Quotes:

“The Australian dollar has weakened at the start of 2020 with a new global risk dominating sentiment – the spread of the coronavirus from China across the globe and the potential knock-on impact this might have on global growth. As we stated here last month, we see scope for the RBA to ease its monetary stance further and the additional virus risk to global growth would seem to reinforce the prospect of monetary easing.”

“Market expectations of a rate cut on 4th February have receded, triggered mainly by better domestic data. The labour market report in particular was stronger than expected – the 28.9k gain in employment in December resulted in the unemployment rate falling to 5.1%. Annual inflation also picked up in Q4 from 1.7% to 1.8%. However, drought and the wildfires may have influenced food prices (fruit) to a degree and hence we are sceptical of the RBA reading too much into the higher inflation reading.”

“We would also argue that with other key global central banks now running policy framework reviews given downside misses to inflation targets, the RBA could see the merits in prompt pre-emptive action given where inflation is. The Australia rates curve has a cut priced by later in the year and hence acting sooner rather than later makes sense. Whether the RBA acts in February or not, we see global risks and mixed domestic economic data as reasons for AUD holding at current weak levels.”