Sean Callow, Research Analyst at Westpac, notes that the RBNZ declared that international risks “are to the downside and relate to the prospects for global growth, particularly around China.”
Key Quotes
“Chinese growth momentum is of course vital to the export prospects of both Australia and New Zealand. So while the RBA has not judged China’s recent economic and financial market developments as being sufficiently concerning to cut the cash rate again, such concerns are likely to hamper both AUD and NZD in the weeks ahead. AUD/NZD should struggle beyond 1.15.
While Chinese markets have been a lot more stable in recent weeks, caution prevailed on fiscal policy in the annual NPC targets. Moreover, while Saturday’s data releases are the first hard numbers on China’s 2016 industrial output and fixed asset investment, the trade data in Jan and Feb did not inspire optimism.
Yet hard data on China’s economy has been a bit lost amid the stunning moves in iron ore prices. These have been trending firmly higher since mid-January but we could not have been prepared for the spot price to surge 24.5% in 2 days, 18.6% on Monday alone (MBI). Supply disruptions may have impacted these spot prices but the futures markets are showing clear signs of speculative fever. Volumes on the Dalian exchange are astronomical in comparison to in Singapore and New York. This muddies the picture for Australia’s terms of trade but at the very least, export prices are a lot more promising than say 2 months ago, raising fair value estimates for AUD/USD. With global risk sentiment broadly positive and the RBA still sounding hopeful on Australian growth, AUD/USD’s rally could extend as far as 0.76-0.77 before running out of steam.”
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