Weakening Fundamentals Corroborate Our FX And FI Views
BMI View: We believe the Australian dollar will weaken and Australian bond yields will head lower in light of the economic slowdown that is becoming more evident. We expect the economy will continue to struggle due to domestic and external factors, which we believe will translate to depreciatory pressures on the currency and provide room for the Reserve Bank of Australia (RBA) to cut its policy rate by 50 basis points, underpinning our bullish position on Australian bonds.
We believe our forecasts for a weaker Australian dollar and lower long-term yields remain well-placed, as economic indicators are deteriorating in line with our expectations for growth to slow. We see the economy struggling on both the domestic and external fronts, due to a rigid labour market and weakening demand for commodities from China.
Indeed, on the domestic front, Australia's rigid labour market has meant that businesses have been unable to lower wages in response to falling demand, forcing firms to cut jobs instead. Inevitably, unemployment has been rising from 5.4% at the start of 2013 to 6.0% in January this year, which bodes poorly for private consumption growth. On the external front, the impact from the structural rebalancing that is underway in China on Australia is beginning to materialise. Latest capital spending indications surveyed by the Australian Bureau of Statistics (ABS) suggest that businesses are actively reassessing their plans given the dimming outlook for demand and prices of Australia's main export, iron ore (which accounts for more than 30% of total merchandise exports).
|Mining Sector Now A Liability|
|Australia - Planned Capital Expenditure, By Sectors (% Of Total) & Mining Sector Contribution To Overall Growth (RHS)|