(MENAFNEditorial) The AUD is an expensive currency. According to Bloomberg, the AUD is over 26% expensive against the USD in Purchasing Power Parity terms (Bloomberg, sample 2000-2013) and on a real trade weighted basis it is almost 15% above its long term average (Bloomberg, sample 1990-2014). This is providing a headwind to the rebalancing of the Australian economy, particularly given the declines in its key commodity prices. However, this headwind is not sufficient to warrant looser monetary policy. This suggests the main tool the Reserve Bank of Australia has to push the AUD lower is verbal intervention. Last week saw two more attempts to jawbone with the currency lower. In a rare interview with The Australian newspaper Glenn Stevens (Governor of the RBA) discussed how he expects the AUD to decline. Later in the week, the RBA minutes from July repeated the RBA's message that they believe the AUD is high by historical standards. But with market also aware that the RBA is unlikely to back up its words with actions, the comments had minimal impact on the AUD. We continue to believe the AUD will trade within a 0.90-0.95 range against the USD until US yields meaningfully rise.
NZD: Weaker price pressures place doubt over the timing of the next rate hike
Just a week ago, the market's expectation that the Reserve Bank of New Zealand would hike rates its policy rate again in July helped the NZDUSD to almost surpass its post float high of 0.8843. This exuberance created a packed long NZD position (as evidenced by the latest CFTC data) with heightened vulnerability to disappointing domestic news and external shocks. This week delivered both. Domestically, Q2's CPI inflation underwhelmed at 1.6% y/y (the market had expected 1.8%) while the GlobalDairyTrade price index hit its lowest level for almost two years (Reuters). These prints raised question marks about the timing of the next rate hike and pushed NZDUSD lower. The sad news from Ukraine alongside new Russian sanctions saw all "risk on" currencies come under more modest pressure towards the end of the week.
Despite the weaker than expected price prints, we still expect the RBNZ to hike its policy rate to 3.5% next week. We believe confirmation that RBNZ's rate hiking cycle is on track will help the NZDUSD push back towards its post float high – particularly given the cleaner positioning. Longer term, we expect NZDUSD to modestly depreciate as US yield rise, while we expect AUDNZD to remain range bound.
TRY: Not trying very hard!
The Central Bank of Turkey cut its main policy rate to 8.25% this week. This was a second consecutive cut and was widely expected. Of more surprise was its decision to cut to the overnight borrowing rate by 50bps to 7.5%. The market expects another 25bps rate cut in August. Despite the looser policy, USDTRY is largely unchanged on the week. We believe this is for three reasons. First, looser policy was expected. Second, the overnight lending rate was unchanged at 12%, which means that the central bank can still push the effective rate in the market to 12% to help defend the TRY (if needed). Third, US 10y yields have fallen below 2.5%, keeping the carry trade supported for now.
We believe that investors will be able to profitably hold tactical long TRY positions while US yields remain anchored to 2.5%. The on-going tension with Russia may provide another near term support as investors seek an alternative high yielding EEMEA currency to the RUB. However, when US yields rise, we hold tight to our view that the TRY is one of the most vulnerable high yielding currencies. Turkey's inflation registered 9.16%y/y in June (Bloomberg). In our opinion, this figure is unlikely to fall the central bank's forecast of 7.6% by year end due to Turkey's stubbornly high food price inflation. Where the central bank has been more successful is in flattening its yield curve, with 5y bond yields just 25bps above the policy rate of 8.25%. However, this means that Turkish bonds currently offer a negative real yield and that this may not change this year. This is not a good position to be in when your current account is still above 4% of GDP (Haver, Q1 2014) and your FX reserves are minimal! Another concern is the political environment. In our opinion, the Bank's recent easing decisions have been partly in response to Erdogan's demands for looser policy. We remain concerned that this may limit the Bank's ability to hike in future periods of stress. If so, this would mean the currency should have to make the majority of the adjustment. We continue to expect the TRY to depreciate over the next year.
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