Tim Baker, Strategist at Deutsche Bank, expects increasing signs of Australian domestic weakness to outweigh a decent data flow in China and against the backdrop of Fed hikes, they expect the AUD/USD to hit 70c by year end.

Key Quotes

“Two days brings two different Chinese PMIs. Weakness in today’s Caixin PMI has weighed on the AUD, despite the more robust tone from yesterday’s official PMI. We make three observations:  

• The market is right to focus attention on the Caixin PMI. It’s more consistent with other indicators like the Spaceknow Satellite Index, and is better correlated with the AUD. 
• The fall in the Caixin PMI points to only modest AUD downside. And the AUD largely looked through the strength in the PMI earlier this year.
• Other indicators suggest less need for worry around a serious slowing in China. The Asian export cycle (which relies heavily on China) remains strong, and that’s also been supportive of the AUD historically. Of course, that’s backward looking, but Asian company earnings revisions tend to lead the export cycle, and they remain firm (the idea being that analysts following the companies get a real-time feel for export orders, and that’s reflected in their earnings changes). Further, the OECD and NBS lead indicators remain solid.” 

“So where to for the AUD? We do expect downside in the second half of the year, but look for the drivers to emerge on the domestic side. Yesterday’s capex survey provided minimal hope for a rebound in non-mining capex next year. And while retail sales handily beat expectations (and pushed the AUD higher prior to the release of the China PMI), we still see weakness in the consumer. April’s firmer retail number followed two months of falls, and the equity market doesn’t believe the consumer is improving. Retailers’ valuations are at a decade-low relative to the market, and analysts have been cutting earnings forecasts.”