Base and bulk commodity prices have been on a tear in recent months, creating optimism over the outlook for the Australian economy.
It’s been that compelling to Goldman Sachs’ Australian economics team that it believes the economy “has moved through an important transition point” that will lead to faster economic growth and a higher Australian dollar ahead.
It said that the recent price spike in Australia’s key commodity exports will create a “sharp turn in Australia’s national income dynamic” that will “likely to set off a chain of events through the Australian economy in coming months”.
As a result, it now sees the Aussie dollar trading higher up to 78 cents against the US dollar within the next three months.
However, while Goldman are bullish on the prospects for the Australian economy and the outlook for the Australian dollar, not everyone shares this view.
Robin Winkler, currency strategist at Deutsche Bank in London, certainly doesn’t, outlining three reasons in a note released on Wednesday why the outlook for the Aussie is bearish.
His call is based around three specific factors: weak domestic inflation, the likelihood a reversal in the prices for Australia’s key commodity exports and long positioning among currency speculators.
“We believe Australia’s domestic inflation pulse is much softer than in Canada and New Zealand, and it will take more depreciation to reflate the economy than rising US yields can deliver on their own,” says Winkler. “Both the RBA and the rates market have discounted evidence of softening wage pressures, but another disappointing employment print for November could trigger a dovish repricing of the front-end.”
On the rally in commodities seen in recent weeks, he says that US dollar strength will eventually weigh on commodity prices. He also says that the rally in Chinese futures is also prone to reversal risk.
“The broad commodity complex is at risk of snapping back into line with the strong USD,” says Winkler.
“However, Australian miners are most imminently at risk from a bursting of the speculative bubble in base metals and bulk commodities.
“Chinese policy-makers have not only started to defuse explosive turnovers in speculative commodity futures trading but also partially reversed misguided supply restrictions on coal mining in particular,” he adds.
This chart below from Deutsche shows the relationship between commodity price movements and the US dollar index. There’s been a noticeable divergence from the relationship seen in recent years, likely due to speculation over US president-elect Donald Trump’s mooted fiscal stimulus plans.
The final factor that underpins Winkler’s view, and the strongest bearish influence in his opinion, is current investor positioning.
“The Aussie faces the strongest headwinds from being the most consensus net long in G10 as well as from its extreme overvaluation, which is second only to the RMB and CHF.”
While Winkler nominated no specific target for where the Aussie will end up against the US dollar, he says that its outlook remains “most bearish” compared to the Canadian and New Zealand dollars.
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