AUD headwinds continue to build - Nomura

Peter Dragicevich, Research Analyst at Nomura, suggests that there are positive signs around the Australian domestic growth outlook, particularly regarding infrastructure and non-mining business investment coming through, the inflation backdrop remains benign.

Key Quotes

“The inflation pressures in Australia are narrowly based. This lack of price pressures was further reinforced by the lacklustre Q3 Australian wage data. The Wage Price Index (excluding bonuses) showed little acceleration (up just 0.48% q-o-q) despite the 3.3% increase in the minimum wage having fed through.”

“The tepid wage growth in part highlights the excess capacity that still exists in the labour market, and helps to strengthen our expectations that the RBA will maintain its patient approach. Indeed, the lack of a pick-up in wage growth in Q3 given the legislative changes is likely to have disappointed policymakers, and will only further highlight the uncertainty the RBA has about “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. Furthermore, the combination of elevated household debt levels and flat growth in real wages is likely to remain a headwind for consumption, something market participants have been increasingly focused on following the run of weaker-than-expected Australian retail sales prints.”

“Looking ahead, with positioning measures continuing to show that leveraged participants are long AUD, and interest rate markets still pricing in the prospect of a rate hike by late 2018, we think downward surprises in the economic data could generate a more pronounced market reaction.”

“Looking beyond the domestic developments, the slowing growth in the Chinese economy, coupled with the push by policymakers for further supply-side reforms and deleveraging and lingering supply concerns in a number of bulk commodities, has seen momentum in industrial metal prices turn down. A continuation of this dynamic would further damp sentiment towards AUD in the near term. Moreover, based on its historical sensitivities, we also think AUD remains vulnerable to a further short-term worsening in risk sentiment.”