Cyclical Rally In Broader Bear Market

Property Market Declines Could Trigger Consumer Deleveraging

By Stuart Allsopp

     SINGAPORE (MNI) - With net speculative positioning deeply negative, terms

of trade improving, and the downtrend from the January highs having given way,

the Aussie looks set for further gains in the near term. However, the economy's

long rebalancing process is not yet over and a significant rise in the Aussie

would likely prove unsustainable.

     AUDUSD looks set to trade higher in the near term with the 0.74 congestion

area marking the next upside target following the break of multi-month trendline

resistance. Net speculative shorts as a share of open interest are at a near

record -43%, suggesting there is room for short covering to squeeze the pair

higher.

     The historical correlation between AUDUSD and Australia's terms of trade

also supports the idea of further near-term gains. The Citi terms of trade index

for Australia is back at its highest levels since 2014, which should act as a

natural appreciatory force on the AUD. Exports of coal, iron ore, and LNG are

all at or near all-time highs thanks to both a recovery in prices and a

continued rise in export volumes.

     LONGER TERM BEAR MARKET NOT OVER

     The Australian economy has undergone a major rebalancing over the past few

years which has gone hand in hand with weaker growth and a long bear market in

the Aussie dollar. The trade balance has gone from deeply negative to a solid

surplus as a weaker Aussie has helped support exports and curtail imports,

narrowing the current account deficit and reducing external indebtedness.

     However, the rebalancing is unlikely to be over yet as the country's

still-large external debt levels keep the income account deeply negative and the

current account firmly in deficit. It would take a much further rise in exports

or a sharp drop in imports to see the trade surplus rise sufficiently to balance

the current account, and a weaker currency is needed to facilitate this.

     SAVINGS RATE HEADWINDS

     One of the main factors keeping the current account deficit in the red is

the country's extremely low savings rate, which sits at just 1% of GDP, its

lowest in over a decade. With property prices coming under some downward

pressure and credit conditions remaining tight, the next leg of rebalancing

could come from a rise in the personal savings rate as overleveraged consumers

are forced to cut back amid declining household equity.

     Faced with the prospect of weaker consumer spending and still favouring a

weaker Aussie dollar to help support external rebalancing, the RBA will struggle

to embark on any meaningful rate hiking cycle. This should keep US-Australia

real interest rate spreads firmly in the US's favour and cap any gains in the

currency.

--MNI London Bureau; +44-203-865-3820; email: Ian.Stannard@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com