AUD: A short rest on a descending path – Deutsche Bank

The AUD TWI has done well over the past week – the run of Q1 data hasn’t disappointed expectations, and the RBA retained a neutral tone notes Tim Baker, Strategist at Deutsche Bank.

Key Quotes

“Nonetheless, the detail of the data does look AUD-negative in the medium-term. We remain hesitant to sell vs the USD at this point, but like selling vs CAD.”

“Trends in the balance of payments

The broad basic balance is trending around zero. That’s lower than in recent years, but a reasonable level by historic standards, and is roughly consistent with where the AUD is trading. But the composition of the balance of payments suggests some downside risk ahead:

• The trade balance is around zero – good relative to history, but the large drop in the iron ore price this year suggests a deficit could return.
• Portfolio flows are negative – it’s hard to entice foreign investors when Australia’s rate differential has all but disappeared.
• Net foreign direct investment remains strong, holding at record highs. But much of that is linked to (falling) resource capex, so should fall in time. (The fact that it has held up thus far may partially reflect that the AUD-intensive component of the capex happens at later stages – imported equipment gets assembled by local labour). Further on capex, nonresource businesses are yet to step up to the plate as resources retreat, taking capex/GDP to a 20-year low. That’s tended to be negative for the AUD historically.”

“Two points to make on macro momentum

• Private spending (ie, consumption plus capex) continues to grow by less than 1% yoy. The RBA cites volatility in data and improved business sentiment (a nod to the above-average NAB business survey). But sentiment looks overstated to us – historically it’s tracked closely with earnings revisions for listed small companies (who are mostly exposed to the domestic cycle), but there’s been a divergence of late. 
• Discretionary consumer spending hit a four-year low of 1½% in value terms.”