Deutsche Bank says it's nearly time to sell the Australian dollar

Photo by Mark Wilson/Getty Images

The Australian dollar has been on a tear over the past month, jumping over 6% against the US dollar.

At .7960, the AUD/USD now sits just 40 pips shy of reclaiming the 80 cent level for the first time since September, boosted by higher commodity prices, a weaker US dollar and near euphoric levels of investor sentiment.

To some, it’s not a question as to if but when the Aussie will rise back above this level.

AUD/USD Daily Chart

To Tim Baker, strategist at Deutsche Bank, if the Aussie does venture higher it’s unlikely to be long, providing traders an opportune time to position for a reversal in the period ahead.

He nominates four specific factors — all domestic orientated — to justify why he’ll be looking to sell.

Here’s Baker’s thinking.

1. Employment data has been exceptionally strong of late. Lead indicators suggest that this Thursday’s print will be solid, but sooner or later there’s the risk of a disappointment. Both the growth in jobs, and the outcome vs expectations, are running around historical highs.

2. The RBA has tended to signal its discomfort with the level of the AUD as it approaches 80 cents. Even a mild change in tone in the RBA’s early February communication could see pricing for a rate hike drop.

3. We think better consumer spending of late is mostly a wealth and holiday effect. Later in Q1 we expect spending growth to moderate, given wage growth remains soft. Australia’s wage growth is lagging peers, and historic relationships suggests AUD downside.

4. There’s excitement about real GDP growth picking up in 2018, but we think nominal growth matters more. For most countries the two measures move closely together given inflation is fairly stable, but Australia is a notable exception, given the terms of trade swing around a lot. The bad news is that nominal growth has more downside than upside this year, as the best of commodity price growth has been seen. Over the past 15 years, the RBA has generally hiked when nominal GDP growth was 7% plus, but the growth rate now is 6% with downside risks.

All four reasons put forward by Baker point to the likelihood that the Reserve Bank of Australia (RBA) may leave interest rates unchanged again in 2018. And with markets close to fully priced for a 25 basis point increase by the end of the year, any reduction in those expectations will likely act to weaken the Aussie, as this chart suggests.

Source: Deutsche Bank

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