AUD/USD looks pricey above 1.0600 – Westpac

AUD/USD looks pricey above 1.06 in terms of yield spreads, commodity prices and softening global growth, says Sean Callow, from the Westac FX Strategy Team in Sydney: “Our baseline scenario is a retracement to the high 1.03s near term. The key risk to this view is from Fed and/or ECB liquidity measures which could fuel a break of 1.08.”

Westpac analyst adds: “We expect the RBA to cut the cash rate twice more in H1 but interest rate markets consistently price at least 3 such easings. The key question in coming weeks is whether the Fed delivers on its recently dovish tone by launching QE3 on 13 March or at least preparing the groundwork. AUD would be one of the
main beneficiaries of such anticipation, if the Sep-Nov 2010 lead-up to QE2 is any guide.”

AUD/USD continues to sit well above Westpac short term fair value estimate which is derived from yield
spreads, commodity prices and risk proxies. “Unusually strong net foreign direct investment inflows seem to
have been a factor in AUD resilience. These may yet persist, at least in the resources sector” the team concludes.

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