Since the last update on the
AUD in this post, the Aussie has retraced back towards the lows seen in earlier in the year of ~US0.89 cents. In general, the rationale for the expected decline largely played out into year end, with the currency getting a further downward push via some strong jawboning from the RBA.
At US0.89, there is much less of a case to be particularly bearish on the AUD without some kind of new catalyst. The impact of tapering on US bond yields has largely already happened, with it unlikely that a decision by the FOMC to further pare back purchases unlikely to tip yields higher than the current ~3% level. So its unlikely to come from here.
On the Australian domestic front, things remain mixed, although there are signs that the current monetary policy settings are doing enough to keep things stable at slower growth. Interest rate sensitive sectors like housing and consumption continue to be strong, although not drastically so given the monetary easing to date. Confidence remains patchy for both consumers and businesses. There continues to be a lot of focus on house price growth, although this is largely a function of investor activity in Sydney.
The "capex cliff" created by weakening mining investment has, so far, not been as bad as it could have been, with stronger exports so far providing a major offset. But that impulse will fade as the rate of export growth slows and investment retraces much faster. So the picture is still for pretty soggy activity, but not dramatically lower than many are expecting.
The biggest source of downside risk seems to be emanating from Australia's largest trading partner in China, where growth appears to be slowing a bit faster than many expected. High-frequency indicators like
coal burn and
steel production look noticeably weaker in December, while
spiky SHIBOR rates and slower credit growth do not bode well for headline indicators.
Net speculative positioning in the AUD is fairly short, although still below the levels seen earlier in the year. So there is some room for more short interest to come into play.
That said, I'm not so sure there is a huge compelling catalyst for more shorts to come in. Domestic data might be a little soggy and China a bit weaker, but it would be a surprise if that moved the AUD sharply lower from here.
So it probably still pays to be on the short side of the AUD at these levels, although the case for it is not as compelling as a couple of months ago.
