Maybe the FOMC don't 'have' what it takes and AUD/USD will fly again, eventually? - Nomura

Analysts at Nomura explained rather than simply being beguiled by patterns of the past, the key question for us is whether coincidental macroeconomic events that have transpired to weaken AUD/USD significantly in May will come through again in 2017? 

Key Quotes:

"In short, we do not think this will be the case. We note that:

(a) that the RBA kept interest rates on hold at its 2 May meeting and provided no policy bias. On the US side, the FOMC is expected to stand pat at its 3 May policy meeting, but according to our US economists, weaker core PCE inflation, combined with soft Q1 US GDP, and the below-trend March nonfarm payrolls report, poses a challenge for the FOMC in terms of how to assess the overall health of the economy.

"With the market now pricing in a better-than-50% likelihood of a June FOMC interest rate hike there does look to be scope for expectations to be pared back, particularly if coming US data underwhelm expectations and/or the data-dependent FOMC softens its language."

"We are looking for the next FOMC rate hike to come through in September. This combination suggests a sharp narrowing in the nominal Australian-US two-year swap spread in May 2017 is not on the table. 

(b) In contrast to the recent US data flow, the pulse of the eurozone economy has been strengthening. This, and the broadening market outlook for the ECB to signal a tapering of its asset purchases later this year, should keep the EUR supported, especially if the second round of the French Presidential election (7 May) results in a benign market outcome.

 (c) Given the sharp moves lower in iron ore prices over recent weeks, a further large correction in May could be difficult to come by. Nevertheless, the demand and supply imbalance in this market should keep prices at lower absolute levels compared with earlier this year. 

All up, barring a sharp deterioration in global risk sentiment, significant outperformance in US economic data, and with broader global growth momentum still positive, we believe this points to AUD/USD consolidating with a potential bounce back towards the top half of the 0.7440-0.7750 range it has occupied since early February over coming weeks, rather than weakening steeply in May as it has in past years. 

This fits in with our longer-term outlook, where our base case is for AUD/USD to track in and around 0.76 over coming quarters, but for AUD to underperform other key crosses, such as EUR/AUD. 

The combination of the patchiness in Australian economic data, the lower level of Australiacentric commodity prices, an expected moderation in the Chinese property market and a lack of a positive monetary policy impulse as the RBA remains on the sidelines is in contrast with our upbeat view on the eurozone economy and expectations for the ECB to signal an intention to taper its asset purchases later this year."