The haevy losses of the USD have undone any efforts from RBA to cap gains with ease, as it breaks milestone after milestone. Technically we could now be headed for 83.40. The haevy losses of the USD have undone any efforts from RBA to cap gains with ease, as it breaks milestone after milestone. Technically we could now be headed for 83.40.
Australia’s terms of trade, a measure of export price competitiveness, declined by -5.6% in Q2 to erode some of the 7.6% increase in Q1. This breaks a 4-quarter streak of gains which helped the annual rate move as high as 32.4% in Q1, which has now edged lower to 22.1% YoY.
Export prices were the main culprit as they declined -5.7% QoQ versus +9.4% previously. Imports only declined -0.1% QoQ following a +1.2% gain in Q1. This now brings exports down to 22.5% YoY versus 31.7% previously.
The correlation with the raw terms of trade index compared with the Australian Dollar is strong over the longer-term. They don’t always match up in terms of gains on a quarterly basis but the trend is resected. Even with Q2’s decline, one could argue that AUD remains below fair value in relation to the terms of trade. If so, then it is another reason the RVA are to be concerned with a rising AUD.
We previously showed the long-term chart for AUD inverted to show the bigger picture. Once flipped upside down the topping pattern appears much clearer when price touched the original neckline. Since breaking above the neckline, the 2016, the 200 wk eMA and now 80c with apparent ease, we think there could be much more upside to come. The milestones it has cut through lie butter are usually levels one would expect to prompt more resistance. And it is this ease of upside breaks alongside the trajectory of the current leg higher which make us think this is the breakout of a large-scale macro move.
If we continue to follow the momentum path of the original leg higher from the 2015 lows, AUD could be headed straight for 0.834. It may find resistance around 0.8466 (2014 high) but we expect it to remain above 80 unless USD can make a quick recovery. If 0.834 is broken then 0.8450 is a viable area for a correction as it marks the 38.2% retracement form the 2015 low to 2011 high.
And this is where the RBA have real issues as they want their currency lower, not higher. We saw the reaction Guy Debelle provided below 80c and we doubt he has changed his mind since. Therefor we must seriously consider the potential for the RBA to cut once more despite fears of further stoking the fire for hot property prices.
Producer prices will be in focus tomorrow to see if they can throw some support under this week’s CPI set. We doubt it will have much of an impact on AUD in the grand scheme of thigs because that is simply hurtling higher due to a great macro unwind of the US Dollar.
