The AUD/USD Rally is Likely to Extend say Goldman Sachs, CIBC Markets, Not So say BNP Paribas

Australian dollar

Three notable institutional analysts give us their take on the Australian Dollar and why it is pointed higher against the US Dollar.

The Australian Dollar has been trending higher against the US dollar since mid-July now, with little to suggest this trend is likely to break.

In fact, at the time of writing, the AUD/USD exchange rate is itching to break to its highest levels since May with the pair quoted at 0.7669.

At its meeting of 2 August, the Reserve Bank of Australia cut interest rates, from 1.75% a 1.50%.

This was the second cut this year, after the May intervention. On announcement of the decision,  the Australian dollar dropped only marginally, and resumed its uptrend shortly thereafter.

In May, by contrast, the interest rate cut had prompted an immediate correction of the exchange rate, from AUD/USD 0.76 to 0.71 in three weeks.

What does the reaction to the August cut tell us about the way forward, can the AUD continue to rise?

Yes suggests Robin Brooks at Goldman Sachs, in a note provided to us courtesy of eFXNews, the institutional research providers:

“We periodically use regression models to map things like interest differentials, commodity prices and risk appetite into exchange rates These models are always subject to a large grain of salt, but they can be helpful in digesting the myriad drivers of FX.”

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One of the main signals that has come out of this exercise is that AUD/$ is too low relative to fundamentals, a signal that Goldmans highlighted end-May, when AUD/$ was below 0.72.

That signal is still active and puts the cross above 0.80 notes Brooks.

“This is in line with our economists, who recently switched to a more agnostic view, after being AUD bears for many years. In addition, while a further RBA rate cut in November is possible, we do not see the odds as more than 50 percent, essentially in line with market pricing. In short, the path of least resistance is for AUD/$ to continue converging higher,” says Brooks.

Meanwhile, Andrew Grantham at CIBC Markets, says based on previous behaviour, he sees further Australian Dollar gains.

The RBA eased policy a week ago cutting interest rates for the second time this year. But by signalling that this may be it for now the Aussie dollar actually appreciated afterwards.

Of course, that initial reaction could reverse acknowledges the analyst, particularly if the Fed starts getting closer to hiking again.

“However, history suggests that typically the initial reaction to an RBA cut, whether it be appreciation or depreciation tends to stick,” says Grantham.

That suggests some upside risk to CIBC’s call for AUDUSD to fall to 0.70 by the end of the year.

Time to Go Short: BNP Paribas

The NAB business conditions report for July surprised to the downside, with the business conditions and confidence indices falling 4 and 2 points respectively.

The data provides the chance to consider the downside risks argue BNP Paribas in their latest strategy note to clients:

"Our bearish view on commodity currencies has been challenged by the better risk environment. However, our BNP Paribas FX Positioning Analysis framework highlights that the market has now gone long AUD to the greatest extent seen since early May.

"With Chinese import data released Monday having come in weak and markets likely to increase Fed rate hike pricing in the coming weeks, we think risk reward is once again looking increasingly attractive for new AUDUSD short positions."