Saturday, December 22, 2012

AUD remains vulnerable; 75bp in rate cuts expected next year

There are clearly a number of reasons that "non-commercial" short positions on the Australian dollar have been cut (see discussion) by investors. But the Australian dollar remains vulnerable to the downside - particularly now that the net non-commercial CME position is near record highs. Investment-related portfolios are positioned long.

CME non-commercial net (source: CME)

What many fail to realize is that the Australian government is in a belt-tightening mode as it tries to address its budget shortfall (AUD 2.6bn). The fiscal tightening is expected to be a drag on the economy, pushing the RBA (in spite of its hawkish stance) to cut rates in 2013. Goldman is predicting another 75bp worth of cuts next year, taking the overnight rate to record lows.
GS: - With the fiscal contraction now extending into the FY14 year and coinciding with the ongoing income shock and the transition of the mining investment cycle to being a drag on growth, we believe the rationale for further easing remains in place. We continue to expect 75bp of rate cuts in 2013.
That does not bode well for AUD next year, and investors got a taste of the currency's vulnerability on Friday (in the "risk-off" trade).

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