Australian Dollar Forecast to Fall Towards 0.65 as AUD Enters Overbought Territory

Italian lender Intesa Sanpaolo keep maintaining a negative stance on the Australian dollar despite its recent strong performance.

The best performing currencies over the past 48 hours have been the Australian and New Zealand dollars with the former benefiting from a continuation of good data releases with service sector activity turning positive in February and the trade deficit narrowing significantly.

"Even as China's economy continues to slow we are seeing green shoots in Australia's economy," says Kathy Lien at BK Asset Management, "rising commodity prices including gold and iron ore also lent support to AUD which climbed to fresh year to date highs."

The strengthening in the Australian dollar will however be an unwelcome offshoot of the strong data and be viewed as problematic for the RBA who would prefer to see a weaker exchange rate and the higher it moves, the more agitated they will become.

The RBA would always prefer a weaker Australian Dollar in order to keep pace with falling commodity prices, however, in its latest stetament it made no reference to the strength of the Aussie, which has depreciated substantially in recent months from 0.73 to lows of 0.68, reached in January.

Intesa Sanpaolo's Chief Economist Luca Mezzomo cautions markets on getting overly agressive on the long Aussie trade saying the RBA’s lack of movement on interest rates and brighter outlook for growth are not necessarily reasons to lower their bearish ‘axe-hand’.

Rather they continue to see downside risks prevailing, especially emanating from the possibility of a sharp slow-down in China and/or further commodity price declines.

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Mezzomo cites an improving picture in the U.S and Fed policy as further reason for expecting a lower AUD to USD exchange rate as the US dollar index is expected to outperform after a multi-month break.

"The scenario by which the Fed will resume hiking rates after the 1Q hiatus should also aid a weakening of the exchange rate," says the economist

Intesa Sanpaolo argue that these factors will probably push the exchange rate down to the 0.65-0.70 zone over the next “few months.”

Over the one-year horizon, however, they are not so bearish, “in light of the wide rate differential with the RBA cash rate at a long-term low of 2.0%, but well above rates in all the other advanced economies, excluding New Zealand.”

Risks of a weaker Australian dollar are therefore skewed towards the near-term with a long-anticipated sustainable recovery occuring towards the end of 2016 and into 2017.

Australian Dollar at Risk of Pull-Back

AUD climbed against 5 G10s and jumped 0.78% to 0.7352 against USD following upturn in commodities and equities in US session ensuring it is positioned well to end the week as one of the best performers in global FX.

There is however the concern that the currency is now technically overbought.

"AUD remains slightly bullish in our view against USD amid continued support from firmer risk appetite. Though AUDUSD is technically bullish, we caution that further upside bias is doubtful as it is likely overextended and possibly exhausted from recent advances," says a note from strategists at Hong Leong Bank.

Analysts forecast gains to be moderate, capped at circa 0.7385 with growing scope for a pullback