GBP/AUD Forecasts 2015 / 2016: AUD Losses Ahead But Near-Term Strength Likely

The Australian dollar is forecsat to ultimately decline in the longer-term, but near-term strength could well continue on observations that the currency is oversold.

The Australian dollar (AUD) has advanced against the euro, pound and US dollar over recent days. Indeed, it is the out-performer in the G10 currency space as the below graphic shows:

Should the strong rally in the Aussie dollar seen over recent days come as a surprise? We think not.

One reason for near-term gians is the positive impetus provided by the Abbott / Turnbull saga, and secondly there is the longer-term fundamental view that markets may be overly pessimistic on the Australian currency.

Of course risks lurk, as noted here, but St. George Bank have confirmed to clients that the outlook for the AUD is not all that bad, particularly in the near-term.

In fact, the Australian bank has confirmed that they are sticking with their forecasts for 2015 and 2016 despite the currency having fallen faster than they had initially anticipated.

As such there is an argument to be made that the Australian dollar is oversold at this time.

Worries on China are Overblown

Concerns regarding the outlook for China has resulted in the Australian dollar falling below St. George’s end of year forecast.

Commodity prices have fallen, and markets have moved to fully price in a rate cut from the RBA in the first half of next year.

“In our view, markets have taken an overly pessimistic view on the outlook for China, the domestic economy and interest rates,” says Janu Chan, Senior Economist with St. George Bank.

Indeed, Chan says his team’s expectations of the broader outlook for the Australian economy are not materially different from a few months ago.

“We continue to expect the RBA will leave rates on hold until late 2016,” says Chan.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.014▼ -0.11% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9455 - 1.9536
**Independent Specialist	1.9858 - 1.9939 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

A factor which is currently placing downward pressure on the Australian dollar is the expectation that the RBA will cut official interest rates again.

Markets have moved to fully price in a 25 basis point rate cut from the RBA by May next year. Essentially, if St. George are right in their forecast the Aussie dollar will have to move higher as market rate expectations move back.

US Fed is a Risk

The US Federal Reserve, however, remains a key downside risk for the Australian dollar warns Chan.

“We continue to expect the Federal Reserve will lift rates once before the end of the year. The prospect of a Fed rate hike in 2015 is only partially priced into markets, and suggests there is a strong risk the US dollar will spike if the Fed raises rates as we expect,” says Chan.

The Australian dollar and fellow commodity currencies will likely fall as a result as the flow of money towards the US picks up pace.

That said St. George agree with most other leading analysts in the foreign exchange markets that the path of future rate increases beyond the first move will be more important for the medium-term direction of the currency.

“Therefore, if the Fed decides to hike rates once before the end of the  year,  but emphasises  a very gradual path of monetary tightening, then any appreciation of the US currency for the remainder of this year could be limited,” says Chan.

Australian Dollar Forecast for 2015 and 2016

Chan and his team see a risk that the AUD will rebound in the near-term, thus they have maintained their end of year target at 0.73 US cents.  

However, St. George recognise that downside risks exist for this forecast while sentiment remains fragile.

“Moreover, we do not expect a sustained rally in the Australian dollar. It will likely stay under downward pressure over the  course of 2016, as the tightening cycle of the Federal Reserve takes hold, and we expect the AUD to track near70 US cents throughout early next year,” says Chan.

The pound to Australian dollar exchange rate is forecast at 2.1367 in December 2015. The pair is at 2.1588 at the time of writing.

GBP/AUD could rise to 2.2421 by March 2016 ahead of a climb to 2.2573 in mid-2016.

For the other Aussie crosses, see below: