Australian Dollar Strengthens For Now as Sub 0.70 is Forecast in 2016
The Australian dollar (AUD) may decline below 0.70 against the US dollar in 2016 say Westpac, however near-term strength will be difficult to resist.
The Australian dollar's November advancer continued when Reserve Bank of Australia governor Glenn Stevens hinted interest rates will stay on hold at next Tuesday's. Steven's, in an unusual slip for a central banker, said the case for leaving them steady was one he "happened to agree with".
Markets will take this as suggestive that the RBA is happy with the near-term direction in Australian economic growth.
The AUD to USD exchange rate is at around 0.7270. The GBP to AUD conversion is meanwhile at 2.0812.
The AUD/USD thus trends higher following the bullish channel breakout seen earlier in November.
We have since seen the Australian dollar find resistance at 0.73. “Given the overbought nature of this market, a move lower seems likely today with support levels of $0.7250, $0.7224 and $0.7200 in view,” says Joshua Mahony at IG.
The pound to Australian dollar exchange rate has meanwhile found a floor at 2.08 which could put an end to the November downtrend. In fact the downtrend in this pair has been in place since September and may continue yet.
However, we note that pound sterling tends to find decent buying level around these levels with major downturns reversing here on three occassions in 2015.
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.
The near-term picture for the Australian currency remains constructive say ANZ Research; it seems their opposite numbers at Westpac agree.
Since its deep dive last September, there has been noticeable improved momentum in the currency pair.
Observing the AUD float of daily closes, since December 1983, shows that the AUD/USD 0.70 – 0.75 range is familiar territory, so definitely not an anomaly for the pair.
Sean Callow of Westpac Global Strategy Group says, “AUDUSD has shown clearer signs of pulling out of an aggressive decline since September of last year.
“A break above the 0.7250 level would target a move to 0.7380 which represents the 38.2% retracement of the 0.8164 high in May to the 0.6896 low in September.
“A break above that level would target 0.7469.
“Downside should be limited to the 0.7050 daily trend line of recent lows and then the 0.6935/40 area.”
AUD/USD: Exit At 0.7380
In previous weeks, the steadfastness of Reserve Bank of Australia (RBA) played a great role in buffering the AUD from ongoing weak commodity prices.
But the AUD’s lift may only last until the US’s central bank hikes interest rates in December, as is expected.
“The RBA’s steady hand in Nov and cautiously upbeat outlook for 2016 has provided insulation for AUD/USD from ongoing commodity price weakness,” Westpac's Callow.
“An overhang of speculative short AUD positioning and M&A inflows to Australia have also lent support to AUD/USD in recent weeks.
“The multi-week risks on AUD/USD however remain tilted to the downside. Australia’s key commodity prices are threatening to undershoot even our downbeat projections.
“Moreover, there is still plenty of scope for US yields to rise on confirmation of a Fed rate rise on 16 Dec, with projections of multiple follow-up moves in 2016.
“This should see AUD/USD slip back below 0.70 into year-end, with short term rallies to fade ahead of 0.7380 resistance.”
Elsewhere, Commerzbank's recommended trade on the pair is to add positions at 0.7180, raise the stop to 0.7150. Exit at 0.7380.
AUD Gets Lift from Strengthened Commodity Prices
In an effort to stabilise global oil prices, Saudi Arabia agreed to work with OPEC and non-OPEC members.
So far, economists aren’t sure of the veracity of the Saudi’s pledge, as this is the first time the country is willing to work with other member states to regulate oil prices.
Instead, they have previously opted to allow the market to organically expel higher cost produces – in other words, to push out the US shale industry.
That strategy did not work, as evident by a resilient US oil sector. Nonetheless, time will tell how this pledge plays out.
However, soon after the Saudi’s announcement, news reports came in that a Russian military jet was downed by members of Turkey’s army. Turkey claimed Russia violated their airspace.
This incident led to a boost in oil prices, as instability and tensions were heightened even more in this oil producing region.
With AUD ties to the commodity market, the currency realised a lift too.
