Australian Dollar Faces Further Significant Falls in 2015 Warns Barclays Forecast

The Australian dollar (AUD) exchange rate complex is forecast by Barclays to remain under pressure into the year's end, despite recent strength.

The Aussie dollar has broken out of what has been a very consistent downtrend - in place since the mid-month the Fed meeting.

After dipping below the US$0.70 level, it seems to just be trading sideways slightly above that level, with most of the recent trading taking place within the $0.7000 and $0.7040 band.

The Aussie seems to be awaiting further leads, "but the odds are still skewed to it moving to the downside as strong US data or hawkish statements from Fed members are likely to help push it back below $0.70," notes analyst Angus Nicholson at IG in Melbourne.

Indeed, a short AUDUSD recommendation remains a firm recommendation with Barclays (who also advocate a short EURUSD trade).

Reasoning behind the decision to keep selling Aussie dollars lies with a slowing Chinese economic growth profile.

A slower China should ensure continued commodity price declines, and substantial CNY depreciation are particularly negative for Australia.

There are also risks of additional RBA easing, despite financial stability concerns related to house price inflation.

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“In addition, our Dutch Disease analysis (the decline of a country’s tradable manufacturing sector that results from a commodity-led currency appreciation) suggests that the AUD will likely fall much further than previously forecast,” says Analyst Jose Wynne at Barclays.

While the AUD does not seem terribly overvalued as per the bank’s REER valuation model, commodity currencies rarely settle at fair value and often remain persistently expensive or cheap.

The notion that the Australian dollar is trading at or below fair value is backed up by ANZ Research who have also recently commented that they now see the Aussie having been potentially oversold by traders.

However, both banks see little reason to position for an imminent recovery on a valuation basis.

“AUDUSD has fallen c.12% so far this year, but we expect it to fall another 5% by year-end and 13% over the next year. We see this as a close proxy to being long USDCNY, while avoiding intervention risks from China,” says Wynne.

Commodity currencies will likely continue to face headwinds as these economies wake up to the new reality that the Chinese economy is maturing.

Valuation considerations, sensitivity to China’s growth trend, and evidence of the structural disintegration of manufacturing sectors over years of overvaluation make strategists at Barclays most negative on the AUD and NZD.

They see AUDUSD and NZDUSD at 0.62 and 0.56, respectively, in 12 months.

“While we remain bearish all commodity currencies, our Dutch Disease analysis suggests antipodean commodity currencies will likely fall much further than previously forecast. As such, we now expect AUD and NZD to depreciate by a further 12% against the USD over the next year,” say Barclays.