Fx flash strength in aud not sustainable 14 july 2016

FX Flash

Group Economics Macro & Financial Markets Research

14 July 2016

Strength in the AUD not sustainable  AUD gains after full time jobs surge

Roy Teo

 Strength in AUD to complicate rebalancing in the economy

Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 Fade the recovery in the AUD force 000 3mth avg (lhs) Change in labor

AUD gains after full time jobs surge Optimism in the Australian dollar (AUD) gained momentum this morning after the Australian economy added 38.4k full time jobs in June (2.5k revised upwards in May) according to figures from the Australia Bureau of Statistics. While there are some encouraging signs that the outlook for full time jobs is improving, we like to highlight that in the first half of 2016, the economy shed 19k full time jobs. This is still very weak compared to 74k added in the first six months and 109.5k in the second half of 2015 respectively. The ABS also reported that hours worked by employed people declined and the hours worked in 2016 have not increased. In conclusion we expect wage growth to remain subdued and hence inflation to remain weak.

Full time jobs recovering; remain weak ‘000

Strength in AUD to weigh on economy rebalancing %

50 40 30 20 10 0 -10 -20 -30 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Change in full time jobs '000 3mth avg

Reverse scale %

15 10 5 0 -5 -10 Jan-10

Change in labor force '000 3mth avg

Source: ABS

-20 -15 -10 -5 0 5 10 15 20 25 30 Jan-12

Jan-14

Exports services YoY% (lhs)

Jan-16 AUD TWI YoY%(rhs)

Source: RBA, ABS

Strength in AUD to complicate rebalancing in the economy As policy makers seek to rebalance the economy from the mining to non-mining sectors, the strength in the AUD is likely to complicate the process. With monetary policies in the advanced economies likely to be looser for longer, carry trades are likely to support the

Insights.abnamro.nl/en

2

FX Flash - Strength in the AUD not sustainable - 14 July 2016

AUD. The AUD trade weighted index is more than 2% stronger since the RBA last cut the OCR by 25bp in early May and have surged by more than 5% since June. While business confidence is recovering, consumer confidence in July has declined to the lowest level since April this year. In addition, core inflation in the second quarter (27 July) is likely to remain below 2%.

Fade the recovery in the AUD The trend is your friend. The latter suggests potentially more upside in the AUD in the short term. Nevertheless, we favour fading the recovery in the AUD towards this year’s peak of around 0.78. Financial markets are too complacent, pricing in only 50% and 78% probability that the RBA will cut the OCR in August and by the end of this year respectively. We expect the AUD to decline to around 0.72 in the coming months before recovering to around 0.74 by the end of this year.

Find out more about Group Economics at: https://insights.abnamro.nl/en/

DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands

This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer.

No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof.

Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").

3

FX Flash - Strength in the AUD not sustainable - 14 July 2016