Aussie to Enjoy Relief Rally; But the Longer-Term Downtrend is Predicted to Remain Intact
Today's big event in Australia should have knocked the local currency lower:
"Today’s quarterly Statement on Monetary Policy (SoMP) by the RBA was the dovish communication the market expected but did not get when the Bank eased policy on Tuesday. It presented the most downbeat view on the outlook for the Australian economy since the Global Financial Crisis. Interestingly, interest rate markets did not rally and the AUD did not sell off," notes Ivan Colhoun at ANZ Research.
China ensures relief rally
Chinese data has once again come to the rescue of the Aus Dollar.
"Overall, the market took the results out of China to be net positive and helped rally Aussie to fresh weekly highs as the pair cleared the 9150 level. The Aussie is now fully 300 points off its lows as it continues to rebound after months of relentless selling," says Boris Schlossberg at BK Asset Management.
Schlossberg says that although this appears to be nothing more than a relief rally within an overall downtrend, "the unit could try to climb towards the 9300 level over the next few days before hitting any meaningful resistance."
Barclays: We Forecast the Australian Dollar to head lower
Despite recent positive price action the longer term outlook remains stacked against the AUD.
Kieran Davies at Barclays is forecasting the resumption of Australian dollar declines:
"We still think the AUD is heading lower. AUD/USD rallied about 0.5% following the RBA policy announcement likely reflecting the slightly more neutral tone of the accompanying statement and very short AUD/USD positioning going into the announcement.
"However, the outlook for Australian economic activity remains fairly soft and we continue to expect further AUD/USD depreciation as the US economy picks up in H2 and the Fed begin tapering asset purchases from its September meeting.
"In addition, slowing China growth, the underperformance of base metals, declining safe haven demand for AUD assets will weigh on the AUD going forward.
"As such, we maintain our short AUD/USD trade recommendation, targeting 0.88 in the next 1-3 months (Full Story) and we continue to forecast AUD/USD to reach 0.86 in 12 months."
Another Australian interest rate cut in October
The key source of downside pressure on the Australian currency will be come from interest rate expectations.
The RBA cut interest rates by 25bps to 2.5% at its Board meeting on Tuesday.
This took Australia’s official cash rate to a record low and variable home lending rates back to, or just above, their lows recorded during the Global Financial Crisis.
ANZ Research say they are forecasting the next interest rate cut to come about in October:
"Friday’s Statement on Monetary Policy (SoMP) suggested the Bank is increasingly concerned with the economic outlook. In particular, their forecasts suggest that growth will remain below trend until mid 2014 and the unemployment rate will rise over the next 2-3 quarters (probably to around 6-6.25%)."
ANZ now thinks the Bank will cut interest rates by 25bps in October.
Given the timing of the election, the bank thinks an interest rate cut in September is unlikely.