As global expectations mount for easier monetary policy, Australia’s central bank chief Philip Lowe on Friday bucked the trend by raising the “possibility that rates will need to go up.” In normal circumstances, this kind of talk might be expected to boost a currency.
But on balance, we think the Australian dollar is more likely to depreciate further. Here’s why:
- The domestic economy in Australia remains weak. Wage data has been soft, increasing the risk that core inflation will remain below target for longer. The housing market continues to deteriorate. Higher scrutiny on foreign buyers and incremental taxes have already led to a decline (–14% y/y) in the value of housing foreigners bought last year.
- This softness is increasing the probability that Australia will be the first G10 central bank to start cutting rates.
- Australia’s economic reliance on China poses additional risks, with Chinese GDP set to slow to a 28-year low of 6.1% this year. Any stimulus in China is unlikely to repeat the commodity-fueled binge of 2009. A reported ban on Australian coal imports in China’s Dalian port (since denied by authorities) hints at strains on diplomatic ties, and Beijing’s willingness to wield its leverage.So while we appreciate the RBA’s optimism, we find it more prudent to position for further Australian dollar weakness. With oil prices likely to head higher, and a renegotiated NAFTA already behind us, we prefer the Canadian dollar to the Australian dollar.