More Australian Dollar Gains Forecast at J.P Morgan, Standard Chartered Argue for Caution on AUD

Analysts at a big-name investment bank see the up-trend in the AUD to USD conversion continuing, although upside progress will probably be slower than we have seen of late.

The Australian dollar is a currency that simply cannot be kept down it seems.

A breath of confidence in the currency has come in the wake of the US Federal Reserve's warning it will likely only raise interest rates twice in 2016.

The news has prompted a USD slump and a rally in stocks, commodities and the Australian dollar as the interest rate advantage the country holds over the US is expected to extend.

The action at the US Fed was enough to completely overshadow pretty shoddy employment data released on Thursday the 17th in which it was shown a mere 300 people found jobs in February.

Markets had expected 10K jobs to be created.

The ability of the Aussie to rally despite these numbers confirms, as we have argued before, the only thing that matters for the currency at present is the risk-on / risk-off paradigm.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0148▼ -0.06% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9463 - 1.9544
**Independent Specialist	1.9866 - 1.9947 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

But, Gains in AUD to Slow

The Australian currency is moving higher at break-neck speed, but JP Morgan’s Sally M Auld has stuck to her bullish forecast for the Australian Dollar, although she has down-graded the pace of the rise, expecting a slower recovery to 0.77 by the end of the year.

A combination of a benign outlook for China, a floor in Iron Ore – Australia’s chief resource – and the significant rate advantage Australia has over the rest of the G10 bar New Zealand, provide the three pillars of the bullish outlook. 

They further argue that AUD is currently near ‘fair value’ based on RBA models, and therefore there is little scope of adjustment lower in the medium term.

As far as downside risks go, Auld sees the two main ones for the Aussie as China landing harder-than-expected and the Fed upping the pace of rate hikes as the top two spoilers.

However, overall she does not see China as a major risk, arguing:

“Given the risk of stabilisation in Chinese growth outcomes in 1H16 (given modest monetary easing and scope for small fiscal stimulus), we are minded to downplay the bearish China influence on our AUD forecasts in 1H16.

The FOMC meeting on Wednesday 16 will be a major influencer in regard to the latter risk, as it will show revised members expectations of when they expect a rate hike, in the Fed's dot-plot diagram.

Analysts at Standard Chartered bank also see less risk emanating from China, as the authorities seek to stabilize the economy:

“We expect China to tighten capital controls in the coming months and keep its currency largely stable against those of its major trading partners.”

They also see little risk of the Fed renewing their more hawkish rate hike agenda, expecting them to hold rates in March and only raise once on 2016.

Standard Chartered Argue for Caution on Aussie

As far as the Australian Dollar, goes, however, Standard Chartered take the opposite view, arguing, “we prefer to remain bearish until a clear bottoming of commodity prices is evident.”

They add that a further that continued exposure to China devaluation risks is a further risk which requires caution. 

The bank also notes the RBA has not ruled out further rate cuts.

On the upside, however, they see domestic economic conditions improving and BOJ easing expanding the market in Japan.

This chimes with U.S Investment Bank Morgan Stanley’s perspective, which argues commodity prices are likely to remain lows as, “capacity overhangs adjust.”

Withdrawal of investment in the commodity industry should further keep commodity FX valuations low.

The note ends:

“Our favorite picks in the commodity space are to be short AUD and CAD.”

Neither of these views addresses the trend for commodity producers to self-cut production as a tactic to push prices higher, which has been a major factor in the rise in iron ore – Australia’s principle commodity.

Technical Studies Argue in Favour of Further Australian Dollar Gains

Pound Sterling Live’s own technical analysis supports the bullish view, adding that the pair has formed a bullish double-bottom pattern at the lows, the neckline of which has been broken, and the next active minimum target is therefore at 0.7739 - although the R3 monthly pivot at 0.7693 provides an interim target should the market move quickly.

Still, the potential for a pause/retracement to the rally has increased given the approach of the next line of critical resistance levels.

Technical analysts at J P Morgan agree and say they remain mildly bullish, with the proviso the exchange rate may meet significant, successive set-backs on its journey up to 0.77.

The short term backdrop for AUD has improved with the recent outperformance and renewed trending bias against the USD and for the crosses.