AUD to stay lower later this year and into next year - Westpac

In view of Robert Rennie, Research Analyst at Westpac, AUD is likely to trade lower later this year and into next year following the mix of domestic and international factors.

Key Quotes

“Back in March of this year, we argued that the mix of capital inflow to Australia had shifted more aggressively towards equity funding and that this helped to explain the very ‘sticky’ nature of the Australian dollar around 0.75 through much of 2016. Jump forward 3 months and we feel that the Q1 balance of payments and international investment position data released earlier this week also helps to explain the ongoing A$ stickiness.”

“According to the Q1 balance of payments and international investment position data, the 12 months to March this year saw Australia overfund the dwindling current account deficit through equity inflow to the tune of A$26bn with a whopping total net equity transactions of A$59bn over that period versus a current account deficit of just A$33bn.”

“We see the current mix of equity capital inflow funding the rapidly dwindling current account as likely to keep the A$ sticky around current levels; and that’s case even if we do see further compression in yield spreads.”

“However, as the year progresses; as the Fed raises rates; as China slows and commodity prices weaken, we should see clearer signs of softer equity inflow making the yield spread a more potent negative for the Australian dollar. That should see the A$ lower later this year and into next year.”

“Westpac is forecasting 0.73 by year end and 0.65 by end 2018.”