Analysts at Westpac noted that the Australian dollar is about flat against the US dollar over the past 3 months, but also acknowledged that the Chinese yuan has rallied about 3%.
- Clearly the key factor has been the steady progress towards the US-China trade deal which was finally signed last week.
- The trade deal offers only limited tariff relief for China in exchange for a huge increase in purchases of US exports, which doesn’t seem overly bullish for the yuan.
- But China has at least bought a period of trade truce with the US and if the US has a new president in 2021, the trade deal is likely to be scrapped.
- AUD has background support from ongoing historically large trade surpluses, elevated equity prices and low volatility. But sub-trend growth and muted inflation are keeping markets leaning towards further RBA easing, which seems to be the main driver for AUD.
- Our base case is for the RBA to cut the cash rate to 0.5% in Feb, followed later in the year by another cut and QE.
- This outlook should keep AUD/CNY trending lower, even if recent yuan gains might be somewhat excessive. Any recoveries to above 4.80 are likely to fade, targeting the mid-4.60s multi-week/month.