Outlook for the Aussie dollar
China's decision this week to cut the reserve requirement ratio (RRR) is part of a response to ease liquidity in the market and relax some paint. The move is expected to free up around US$70bn of liquidity, though it isn’t a shift away from its longer term strategy to broaden out the economy.
In my previous discussions, I've consistently emphasised a belief that China is undergoing a profound process of rebalancing. The nation's economic strategies and decisions often diverge from short-term reactions, rooted instead in a deeper, long-term vision.
While the RRR cut might be seen by some as a quick fix to boost liquidity and support recovery, I've always held the view that such short-term measures aren't necessarily indicative of China's overarching plan. Don’t view China from a Western Prism.
I will continue to keep a close eye on China to see what additional measure will be taken to cushion the economic softness, although I don’t expect anything drastic.
Copper prices continue to sit in a tight range and haven’t really moved much off the news. Copper is a very important forward indicator for me and given the recent increase in energy prices, I wouldn’t be surprised to see copper break out from its current range over the next few months.
Timing is always difficult, but I just feel that with the huge pipeline of electric cars and energy transition ahead of us, copper is destined to be in an aggressive demand position relative to supply.
In Australia, BHP’s recent acquisition of Oz Minerals consolidates its position as the Copper Kingpin. BHP sees some short term weakness in the next couple of years due to more supply and copper scrap coming into the market, however the medium and long term demand will absolutely blow this away. If you’re interested, there is a great read here.
Impact for the Aussie battler
The poor old Aussie battler (Australian dollar) has been doing it though among this commodities holding pattern (as China adjusts) and a rising US monetary environment.
It’s hard to back the Aussie at the moment, but I’m happy to go against the grain and see it as a buying opportunity for the medium term. Australia is one of the world’s most attractive, developed economies on the doorstep of the world’s growth engine.
Our commodities and energy sectors are world-class, our economy is strong, resilient and hungry for more migration. Our fiscal position is much stronger than other G20 peers and yesterday’s employment numbers shows the resilience in our underlying economy.
With the AUDUSD in the low $0.60 range, Australia is no doubt on sale and very attractive from a global perspective. Over the past 5 years, the Aussie is down almost 10% against the US dollar but less than 2% against the Euro. Once the dust settles on commodities and US dollar strength, the negative Aussie trade will unwind.
We could see the Aussie test new lows in the next few months, before forming a base, and making an upward move by year-end once. The market could eventually get a feel for US dollar weakness into 2024 from rates, that have probably been pushed too high.
Bonus Podcast: A had a great chat this week with one of my good friends Dr George Marano, a strategy consultant and academic. We explored the journey of change while running a business or organisations and how CEOs can become more adaptive in an exponentially evolving environment.
I hope you enjoy it and I look forward to bringing you more diverse content over the coming months.
Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.