Nordea Research discusses AUD outlook and likes buying dips against the USD and NZD on the back of non-domestic factors.
"Another week, another weak domestic data print from Australia. Calls for imminent rate cuts escalated quickly after last week’s CPI disappointment and almost all IBs now project 2 or 3 cuts from the RBA this year, while the market prices almost two full cuts for the remainder of 2019 (47 bps). Judged from our favourite tracker of unemployment trends in Australia , the Philips curve apologists within the RBA will face a plethora of obstacles over the next 6 months, as unemployment could even pick up by as much as 1 ppt," Nordea notes.
"So why on earth do we suggest buying AUD anyway? Due to non-domestic factors. A weaker CPI trend in Australia is mostly a lagged consequence of the tighter financial conditions in Asia in 2018. The softer financial conditions seen throughout 2019 will likely soon spill-over to a re-increase in the Australian CPI. Easier conditions in Asia lead to a slight rebound in metal prices, which shows up in the domestic price pressure in Australia with a lag. We bet that the Q2 inflation report will be more upbeat than the Q1 report that we received last week. The highly certain influx of USD liquidity in May is another reason to expect AUD/USD to bounce higher within the 2019 range. Accordingly, we even see a decent risk/reward of a hawkish re-pricing of the RBA compared to the current gloomy outlook," Nordea argues.