Australian Dollar Forecast to Strengthen Near-Term but ANZ and Morgan Stanley See AUD Down Early 2017

Analysts at ANZ say the Australian dollar’s recent bout of strength should extend over coming days but the Aussie will still start 2017 at much lower levels than presently noted.

For now, the Australian dollar is back in fashion having notched some impressive gains against both the pound and US dollar recently.

To be sure, the Aussie has been a beneficiary of the misfortunes of others, with the UK currency being bucked by polling results ahead of the UK vote it is hard to find any arguments to own sterling at present.

Against the US dollar, those poor employment data released in the first week of June dealt the dollar rally a blow and markets anxiously await the outcome of this week’s FOMC meeting to ascertain whether the Fed will say the words needed to restore some confidence in the USD which should cap AUD/USD gains.

ANZ Research do however point out that the Australian currency has the backing of some strong domestic tailwinds:

"The AUD has rallied in line with fundamentals. The improvement was driven by both a shift in front end rates and the stabilisation in commodity prices. This means that the recent move is justified in the short term."

Regarding the near-term outlook:

“While we think that the move has been somewhat exaggerated, with the RBA now on the sidelines, the hurdle rate for further weakness in the AUD has risen significantly,” say ANZ.

ANZ note that with little domestic data to latch onto this week, the currency will likely be a passenger to external drivers.

“In the near term, the lack of momentum accounts in the AUD backs up the idea that the recent AUD move has been driven by a perception of a fundamental shift, and likely means that the recent move could be sustained – particularly if the Fed sounds dovish this week,” say ANZ.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0145▼ -0.08% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.946 - 1.9541
**Independent Specialist	1.9863 - 1.9943 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Australian Dollar Forecast Notably Lower Longer-Term

The longer-term prospects facing the Australian dollar are less assured as ANZ warn they see potential growth at 2.5%, below the 3% rate commonly assumed.

“While in the near term this has few implications for the AUD, over the medium term the impact is large,” say ANZ.

If potential growth has indeed fallen, it means that the neutral cash rate at the Reserve Bank of Australia must also be lower.

Lower interest rates in Australia will ensure weaker demand for the currency amongst global investors.

“It means that in the near term cash rates are not as stimulatory as we previously thought, and as such the risk of further easing remains. While second, in the longer term, it means that the overall rate structure in Australia will be lower, and as such Australian rates will continue to converge on global rates,” say ANZ.

Other analysts are in agreement, Morgan Stanley's Charles Rubenfeld says he remains bearish AUD and looks to sell AUD rallies as he expects the RBA easing to push AUD lower.

The RBA was hawkish last week by failing to include an explicit easing bias in its statement, which implies easing in July is almost certainly off the table.

"However, we still believe the RBA will eventually need to react to the worrying inflation trend and still vulnerable external accounts and our economists are now expecting another 75bp of rate cuts," says Rubenfeld.

House price growth is the key risk here; recent acceleration has given the RBA pause, but Morgan Stanley still believe the trend will reverse and see further macro-prudential regulation as possible if it does not.

ANZ's Longer-Term Forecasts

Looking at ANZ’s official forecasts though it would seem that the multi-month picture is less supportive of the Aussie.

Those with impending GBP into AUD currency payments would be better off waiting for a return to strength for GBP.

ANZ are forecasting the GBP/AUD to push to 2.3255 by the end of 2016 ahead of a fall to 2.32 by March 2017.

The rate should extend to 2.44 by June 2017 ahead of a gradual AUD recovery.

There is a certain contradiction in what we are hearing from ANZ. While the Aussie is expected to end lower against sterling towards the end of the year, there is certainly some doubt creeping in.

The Australian / US dollar exchange rate is forecast at 0.67 at the end of 2016, 0.66 in March 2017, where it should stay till mid-year.

AUD/USD Techs: Short-Term Exhaustion?

ANZ are optimistic on the Aussie's prospects over coming days, but an interpretation of the AUD/USD's charts by Commerzbank casts some doubt.

AUD/USD last week tested and failed at the 0.7474/91 zone, this is the 50% retracement and the 55 day ma, it also charted a key day reversal," says Commerzbank's Karen Jones. "This adds weight to the idea that the market has charted an interim peak at 0.75035."

A move back below the 0.7381 October 2015 high should be enough to cast attention back to the 200 day ma at 0.7267 it is suggested.

"Above 0.7505 will see a deeper retracement to 0.7572 and potentially 0.7688, the 78.6% retracement of the sell off from April (not favoured). However both intraday Elliott wave counts are positive and for now we will partially exit our short positions as a precaution," says Jones.