Sentiment towards AUD is now more negative - Nomura

Analysts at Nomura explained that sentiment towards AUD has become more negative. 

Key Quotes:

"While the AUD trade-weighted index (TWI) is still in positive territory for the year, it is now back down to where it was in late January.

In our recent forecast update, we noted that over the remainder of 2017 we expected AUD/USD to range trade, given our weaker USD outlook, but we expect AUD’s relative outperformance on the crosses to fade based on our below-consensus outlook for the Australian economy and as Australian-centric commodity prices fall back due to the moderation in Chinese growth momentum, particularly in the property market, and as a result of rising supply.

The recent AUD underperformance looks to be a microcosm of our longer-term themes. Domestically, some of the high-frequency Australian data such as retail sales and credit growth have been sluggish, and the recent cyclone and flooding in eastern states is an added growth headwind over coming months. As things stand, we think the current consensus for Q1 Australian GDP growth (0.7% q-o-q, as per Bloomberg) is on the optimistic side, and we see downside risks to our own softer 0.4% q-o-q expectation. In terms of the RBA, the relative moderation in the views on the momentum in the labour market and domestic growth pulse at the 4 April policy meeting, coupled with recent steps by regulators to cool segments of the frothy housing market and quell financial stability risks, should reinforce the notion that interest rate hikes remain a distant proposition. 

While our conviction in our long-standing call for a 25bp rate cut in August remains relatively low, we are still reluctant to remove this call given our below-consensus growth views and our perception of the balance of risks.

Nevertheless, from an AUD perspective, the recent dataflow and announcements should mean market pricing for the RBA should not rise in favour of a firmer AUD in the near term. On the external front, with broader measures of risk appetite now at elevated, and arguably “stretched”, levels, the market impact of any flare-up in volatility is likely to be asymmetric in our opinion, with the reaction to a negative surprise likely to be more pronounced than to a positive event. And with key global economic data surprise indices also now near cyclical highs, any signs of faltering in the global data pulse could weigh on growth-linked assets, such as commodities, and in turn high beta currencies such as the AUD.

 This would add to the impact on bulk commodities that has come through on the back of incrementally announced measures by China policymakers to curb lending in parts of the property market (a key source of bulk commodity demand), and as markets question the timing of the new US Administration’s fiscal reforms."