AUD/CNY downside is limited to 4.89 - Westpac

The Australian dollar trended higher against the Chinese yuan in Dec and Jan, benefiting from broad US dollar weakness and elevated global risk appetite, points out Frances Cheung, Research Analyst at Westpac.

Key Quotes

“It has since been almost oneway traffic lower for AUD/CNY, hurt by the return of market volatility, a stabilizing US dollar backed by a hawkish Fed and softer commodity prices.”

“We are cautiously bullish the US dollar in coming months, with growth and inflation trends likely to keep the Fed – and markets – weighing 3 versus 4 rate rises in 2018. As such, USD/Asia should tilt higher but with China’s capital flows fairly balanced, CNY should retrace only a small portion of its YTD gains. We see USD/CNY around 6.35 end- June.”

“AUD/USD has a little more downside given it is a higher beta US$ play, but this is more a story for H2 18 where Fed pricing is more fluid. Near term, commodity prices should hold up fairly well, with global growth optimism not yet notably undermined by US-driven punitive trade measures.”

“If this remains the case, then our AUD/USD 0.77 base case for June implies AUD/CNY downside is limited to 4.89.”