Australian Dollar Outperforms but Forecast Lower in the Medium-Term by ANZ Bank
ANZ Research say that the November strength enjoyed the Australian dollar could well extend but walking into the new year risks to the downside will grow.
The best performing currency of the past 24 hours has been the Australian dollar.
"The recent strength of A$ has been driven entirely by central bank speak. Despite weaker data and lower commodity prices, policymakers remain optimistic about the prospects for Australia's economy," notes Kathy Lien, analyst with BK Asset Management..
November has been kind to the Australian currency; “the Aussie dollar broke through US$0.72 for the first time since 27 October last week, and many in the markets are still playing catch up to the improvement in many of the non-mining sectors of the Australian economy,” notes Angus Nicholson, an analyst with IG in Sydney.
The pound sterling to Australian dollar exchange rate has meanwhile fallen from a November high of 2.1721 to 2.0970 last week. Against the euro, the Aussie has enjoyed almost uninterrupted upside forcing the EURAUD from 1.5510 at the start of the month to the 1.48 we now see.
Markets are exiting their short positions against the Australian currency as domestic data improves and Chinese slowdown fears abate.
This technical repositioning has worked in favour of AUD and is one of the near-term upside drivers that is predicted to remain relevant.
Furthermore, the tenor of domestic economic data releases out of Australia is tipped to remain in positive territory ensuring that the recent positive run continues.
“The optics around the domestic data remain quite positive. As such, an upgrade in investment intentions – as we expect - combined with RBA communication that may point to the positives (notably the labour market and business surveys) could see the AUD squeeze a little higher,” says Joanne Masters at ANZ Research.
The investment spending data is due for release on Thursday.
“This could signify a noticeable turning point in the rebalancing of the Australian economy as non-mining investment begins to steadily expand,” says IG’s Nicholson.
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ANZ are Medium-Term Bearish
Despite the positive tone to the Australian dollar in the near-term we hear that the momentum may be unable to extend into the early parts of 2016.
ANZ’s Masters says she continues to favour a more bearish medium term assessment:
“The current momentum in Australian data is expected to fade in early 2016, while we see the commodity complex as a warning sign for the AUD. Iron ore prices are close to re-testing the mid-July lows, while copper presents an even more worrying picture.”
ANZ believe the copper price one of the ‘cleanest’ litmus tests of commodity demand and the recent steep decline suggests that the global economy remains fragile.
“Indeed, it is rare to see the AUD so resilient when copper prices are falling (see below). The correlation between daily moves in the AUD and copper over the past year has been 88%, but that falls to just 6% in the month to date,” says Masters.
The bottom line? “The near-term picture remains mixed, and a push toward mid-October highs can’t be ruled out. Medium-term we remain bearish,” says Masters.
