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I believe that the local economic data, while being uneven, is taking a more positive tone, with inflation pressure heading higher. We think that the RBA officials are done with the easing cycle, and we are actually looking for a tightening in the latter months of the year.
According to the latest data, job ads jumped significantly - 5.1% which is the most for the past four years, however it contrasts with recent announcement of planned job losses at some high profile companies and an increase in the official unemployment rate to a decade peak of 6 % in January. In your opinion, what is the real situation in Australia's labor market?
Currently the Australian economy is going through structural changes, as it is trying to orient itself away from reliance on the mining sector. As a consequence, the employment situation is going to rotate from a concentration of jobs in the particular places to other sectors of economies. Obviously it is a concern, and clearly if it continues to mount and accelerate, that will be more of a problem. However, it is probably a sign of the transformation that we are seeing within the Australian economy as opposed to point to a major systemic issue.
What in your opinion will be the major headwinds for the Australian Dollar throughout the 2014?
We are actually looking for the Australian Dollar to stabilize around the current levels. We believe that most of the selling pressure is reduced and market still has a very large short position hanging over it. Therefore, that will actually become more of a tailwind than a headwind in the months ahead, thus we are not actually overwhelmingly bearish at the current level. I think that the RBA will remain dovish and cautious until they get more signs that the nation's economy stabilizes. I believe the uncertainty that we are seeing across the emerging markets and specifically in China is clearly a headwind – as is the recent volatility in commodity markets. We are watching this situation carefully and it clearly presents a near-term risk. Although, in my opinion, it is remarkable how resilient the Australian Dollar has been, despite the uncertainty present right now in the Chinese economy and upheaval we have seen in the Chinese Renminbi markets. Ultimately, the Aussie is kind of a barometer to a certain extent of an overall risk appetite, and while local factors are turning more and more supportive, the more risk-aversion type of scenario tends to carry on in the next couple of weeks. Hence, we are looking for more stability, rather than large directional move lower from the current position.
What are your forecasts for AUD/USD for the end of Q1 and end of the year?
We are looking for 0.91 in the end of the first quarter for the AUD/USD and 0.90 for the end of 2014.