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CBA Assesses A$ Downside Risks On Worst Case US Scenario

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In light of the recent turmoil in the global banking sector, CBA weighs in on the implications for AUD if we see a worst case scenario unfold in the US...."AUD/USD has a long history of rapidly falling to low levels during global crises. A possible saving grace for AUD in the current circumstances is that Australia has recorded large current account surpluses in recent years. But the current account is unlikely to prevent large falls in AUD if the worst case scenario in the US occurs, in our view. AUD/USD is still highly exposed to commodity prices. Commodity prices important to Australia are starting to weaken, albeit modestly. We do not want to be alarmist but need to outline potential downside scenarios. AUD/USD can fall below 0.60 in a worst case scenario. However, even in this scenario, we do not expect AUD/USD falls to be sustained. Policy makers will not sit on their hands for long. AUD/USD could snap back if policy makers in the major economies further strengthen the banking system and/or cut policy interest rates. A belated increase in policy support by the Chinese authorities – missing in the recent Two Sessions meetings – would also help AUD/USD to recover."

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In light of the recent turmoil in the global banking sector, CBA weighs in on the implications for AUD if we see a worst case scenario unfold in the US...."AUD/USD has a long history of rapidly falling to low levels during global crises. A possible saving grace for AUD in the current circumstances is that Australia has recorded large current account surpluses in recent years. But the current account is unlikely to prevent large falls in AUD if the worst case scenario in the US occurs, in our view. AUD/USD is still highly exposed to commodity prices. Commodity prices important to Australia are starting to weaken, albeit modestly. We do not want to be alarmist but need to outline potential downside scenarios. AUD/USD can fall below 0.60 in a worst case scenario. However, even in this scenario, we do not expect AUD/USD falls to be sustained. Policy makers will not sit on their hands for long. AUD/USD could snap back if policy makers in the major economies further strengthen the banking system and/or cut policy interest rates. A belated increase in policy support by the Chinese authorities – missing in the recent Two Sessions meetings – would also help AUD/USD to recover."