2015 has seen the Australian dollar exchange rate complex (AUD) come under significant pressure with the downtrend seen through the latter half of 2014 continuing unabated.
"From high on the love index for most of this year, the AUD had found itself in the proverbial doghouse," notes Prash Newnaha at TD Securities in Singapore. The latest leg lower in the Aussie came following a surprise rate cut at the Reserve Bank of Australia (RBA) in February.
The longer-term outlook remains challenging with RBA Governorn Stevens saying the Australian currency remains overvalued and must decline substantially before it reaches what he sees as fair value.
Stevens is not alone in his assessment of the currency's valuation - TD Securities join a number of analysts predicting 2015 to be a soft year for the Aussie as it seeks out fair-value.
The declines have come for a number of reasons - but how will traders treat the currency as we move through the opening stages of 2015? As we head towards February those using the AUD to buy foreign currency have been afforded a spot of relief. The below spot levels mark a sharp improvement on this year's opening levels.
- The Australian to US dollar exchange rate (AUD/USD) is at 0.7776.
- The euro to Australian dollar exchange rate (EUR/AUD) is at 1.4675.
- The pound sterling to Australian dollar rate (GBP/AUD) is at 1.9775.
- The Aus to New Zealand dollar rate (AUD/NZD) is at 1.0354.
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Why The Australian Dollar Faces a 'Soft' Year
As mentioned, while the short-term looks positive, the longer-term prediction is for losses. TD Securities cite the following four fundamental reasons why the AUD will be heading lower in coming months:
- commodity prices in free-fall
- the risks of a Chinese 'hard-landing' remains possible
- pick-up in volatility-hurting carry currencies, for instance the euro
- Both the NZ and Aus central banks have been active in talking down their currencies and will most likely remain so
National Australia Bank (NAB) give the following rationale for a lower Aussie:
- A$ to trend lower in 2015
- increased speculation of a rate cut by the RBA in early 2015.
- caution that lower oil and the lower $A mean the economy is already receiving a boost to medium-term growth.
- NAB continue to look only for an evolution in the Bank’s language at the February Board meeting ahead of a possible cut in March. If there is no such evolution, then a cut in March is most unlikely.
- iron ore prices have traded to new lows, the US$ continues to gain, all forces which suggest the risk of further downside.
But Beware the Recovery Rallies
That said, the path lower will not be smooth as we saw in January, just ahead of the RBA interest rate cut.
The US dollar rally can tend to run ahead of fundamentals and become overblown - a decline in the USD invariably often means a boost for the AUD right across the board.
According to TD Securities a softer USD introduces the possibility of an AUD rally in the near-term. Indeed, the year-end 2014 prediction of USD0.90 held at TD Securities proved to be accurate as the AUD rallied from over-sold conditions.
We could see similar rallies as we move through February and into early March.
Forecasts for AUD/USD in 2015
Nevertheless, TD Securities joins consensus when calling a negative longer-term picture for AUD and a strengthening USD.
TD are fundamentaly USD bulls - by the end of 2015 the bank has its forecast down at 0.84.
The opening months of 2015 will likely see the Aussie dip down to 0.88 before slipping to 0.85 by mid-year.
As such we note the Australian dollar is oversold. That said, these forecasts were released ahead of the RBA rate cut and we would expect the bank to issue fresh predictions for further declines in coming weeks.