Remember my post suggesting why a higher USD is ahead , how is that possible with the coming passing of the $1.5-$1.9T stimulus?
A differential in economic growth in favour of the US over the EU is expected to tilt bullishness towards the DXY (which fortune rest mainly on the USD/EUR exchange rate).
A higher USD , a tepid economic recovery in Australia, an expected commodity-play exit, China economic momentum waning and concerns over end of March Jobseeker and ongoing difficulties on Aust-China relations weighing on our exports and service export sectors , all expected to be headwinds to the Aussie in the coming weeks and months.
Australian Dollar
The macro-themes of reflation, higher commodity prices, and strong Asian, and especially, Chinese demand converge in Australia. Iron ore, coal, and liquified gas account for more than half of Australia's exports. Since the end of October, the Australian dollar has appreciated by around 14.5%, and by some measures of purchasing power parity, it is overvalued. The OECD's PPP model has the Aussie when it is about $0.7700, overvalued by around 13%. The next important chart points are the 2017-2018 highs (~$0.8125-$0.8135), but we suspect an important high is in place and expect it to work its way lower toward the $0.7500 area in the coming weeks. The Aussie has appreciated by nearly 9% against the Chinese yuan, its biggest trading partner. In addition to competitiveness, it also more broadly highlights the strategic dilemma. Its economic prosperity has been linked to China's growth, while the key to its security lies in Washington. The upward pressure on global rates poses a challenge for the Reserve Bank of Australia that targets the three-year yield at 10 bp, the cash rate target in its expression of yield curve control. It may need to expand its bond-buying to achieve its target when it meets on March 2 to bolster the credibility of its stance, with the three-year note above the target at the end of February despite having stepped up its purchases.
