The Australian dollar is under the pump, but Nomura says it's nearly time to buy the dip

Photo by China Photos/Getty Images

The Australian dollar was poleaxed on Thursday, logging its largest one-day percentage decline against the greenback since early May this year.

It was a walloping, not only against the buck, but also against the yen, euro, UK pound and Canadian dollar.

As Peter Dragicevich, FX strategist at Normura put it, the Aussie was hit from multiple angles.

“The combination of a positive USD reaction to the September FOMC announcement, and market participants latching onto RBA Governor Lowe’s lack of urgency to shift the policy dial, has taken some of the heat out of the AUD. S&P’s decision to downgrade China’s sovereign credit rating has only added to the negative AUD sentiment,” he wrote in response to the Aussie’s rout.

However, while Dragicevich still thinks the Aussie could fall a bit further in the short-term as traders trim what looks to be increasingly-stretched long positioning, he does not think that the broader upward trend has changed, suggesting that the AUD/USD is likely to remain supported on any dip into the 78-79 cent region.

He justifies that view by looking at both sides of the AUD/USD equation.

Here’s why he still likes the look of the Aussie.

On the AUD side, the domestic economy continues to show encouraging signs, with investment intentions upgraded, business conditions elevated and momentum in the labour market positive. Indeed, in his latest speech, RBA Governor Lowe reiterated the cautiously optimistic tone, noting that “the economy does look to be improving” and we look to be “on course to make further progress in reducing unemployment” and for CPI to return to target. And although Governor Lowe stated that “people should be prepared for higher interest rates” and agreed that “interest rates are more likely to go up than down”, some of the wind was taken out of the sails of the market’s more zealous shift up in RBA interest rate expectations when he reiterated that global rate rises “have no automatic” implications for Australia.

While Governor Lowe’s apparent lack of urgency on the policy front is in line with our thinking that the Bank will continue to exercise patience, with the economic dataflow remaining solid both domestically and abroad, the prevailing market sentiment about an eventual turn in the RBA rate cycle should remain. This, coupled with the still positive risk environment, the AUD’s positive beta to broader global growth, and Australia’s structurally improved balance of payments position should continue to limit the extent of pull-backs, in our view.

And while Dragicevich likes the look of the Aussie, he remains unconvinced about the prospects for the greenback.

On the USD side, we are unconvinced that the Fed’s perceived hawkishness will translate into a sustained broad-based turn higher. It is worth remembering that the USD has received temporary boosts ahead of earlier Fed rate hikes, only for them to peter out as broader global dynamics such monetary policy convergence among the major central banks, the synchronised global growth upswing, politics and structural forces such as the US current account deficit reassert themselves.

The AUD/USD currently fetches .7920, just above the buy zone indicated by Dragicevich.

AUD/USD Daily Chart

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