AUDUSD Damage How Much More

Where has the yield gone?

Here are the Aussie’s unflattering statistics of the year:

Worst performing currency out of 173 currencies so far this quarter

2^nd worst performing G10 currency behind the JPY year-to-date

Worst performing G10 currency in May, falling 7.2% vs. USD, the biggest decline since September 2011 when it lost 9.7%.

The employment situation has deteriorated in the jobless rate with a 5.5% reading in April, off the 5.6% highs in March-highest since November 2009. Net employment creation remains robust but volatile. The 50.1K increase follows a 31K slump, which was preceded by a multi-decade high of +71.7K. Markets have made up their mind to heed the jobless rate than the statistically unreliable employment figures.

Manufacturing indices are drifting at levels not seen since the global financial crisis (Nov 2009) according to Australian Industry Group’s manufacturing PMI and new orders index. The China question shall continue to linger on Aussie macro performance as long as Beijing issues mixed data.

Aussie bulls will usually point to Australia’s superior debt metrics, which remain the strongest in the G20 universe. Debt/GDP ratio stands at 26.9% vs. 52%, 74%, 81% and 84% for Switzerland, US, Germany and Canada respectively. Australia’s budget surplus stands at 0.5% of GDP vs. +1.3%, -0.80%, -2.5% for Switzerland, Germany and Canada respectively.

From a relative perspective, currency markets have reason to remain bearish. Despite having slashed rates last month to 50-year lows of 2.75%, the RBA is expected to do more. Considering that the last employment report showed some stabilisation and that 2013/2014 capex plans were more positive than anticipated, the RBA is seen pausing at its June meeting, before moving in August. Bond markets currently price a 100% chance for a 25-bp rate cut to occur this year, and a 75% chance of an additional 25-bps by year-end. The timing of these cuts is most like to start in August, and may proceed into Q1 2014.  2.0% handle is increasingly appearing as a long-term target, allowing for 0.90 to be the next objective in AUDUSD.