Strategist Debate over AUD/USD Outlook Heats Up

The Australian Dollar (AUD) is set to hold its own versus the US dollar and possibly climb against other counterparts, according to the views of some analysts, whilst others, still see scope for more weakness.

Those who have taken the currency off their bearish watch list, include OUB’s FX Analyst, Quek Ser Leang, who has changed his view on the AUD/USD pair from negative to neutral.

“AUD is expected to trade within a broad 0.7440/0.7630 range for now,” sys Leang, as quoted by institutional research providers eFXNews.

Taking a similar stance is Jane Foley at Rabobank in London:

"We do expect the RBA to remain watchful for risks in the global economy but in the absence of a move higher in US yields we see downside potential in AUD/USD as being contained."

Foley made the statement in response to this week's appearance of RBA Governor Lowe before Australian lawmakers where the new head of the RBA said it was “not particularly useful” to keep cutting interest rates in order to achieve a weakear AUD.

"On the back of Lowe’s remarks overnight we have edged up our AUD/USD forecast and see downside potential as being limited to 0.75 on a 6 month view," says Foley.

ABN Amro however, have taken the view that despite the RBA decision to jump off the stimulus train, the AUD/USD pair was still vulnerable to losses, especially if the Fed decides to hike rates this evening.

“Given our economists’ expectations for a Fed rate hike at tomorrow’s meeting, we see the risk environment as vulnerable and continue to recommend short AUDUSD through options,” they said in a recent note.

Nevertheless, it has to be said that given there is only currently a 12% chance the Fed will hike, such an outcome seems highly improbable.

That the Aussie might gain versus the pound is a view endorsed by Westpac’s Sean Callow and Martina Song, who wrote in a recent note that they saw the GBP/AUD pair falling to 1.69 over the next few months as the Bank of England (BOE) continues with monetary stimulus and the AUD is supported by strong domestic data.

More stimulus is generally negative for a currency as it introduces more money into the system diluting the individual unit value.

It also tends to dampen interest rates which attract inflows of foreign capital seeking return when they are higher.

With the news of the RBA retracting from more stimulus now as well, however, it means there is even more reason to see GBP/AUD going down.

In his appearance before the House of Representatives, RBA Governor Lowe struck a relatively upbeat tone in his assessment of the economy and reinforced that a flexible inflation targeting framework is still “right”.

There was little new or surprising in either the prepared remarks or Q&A session.

Lowe appeared more accepting of the current level of the currency.

There were few remarks on inflation, but we think it noteworthy that Governor Lowe sees weak wages growth in Australia and abroad as “persistent but temporary”.

The RBA assess that “while mining investment has some way to fall, our estimate is that around three-quarter of the total decline is now behind us” and that if recent increases in commodity prices “were to be sustained then we could look forward to the drag on national income from falling commodity prices coming to an end”.

The non-mining economy is “doing considerably better…business conditions have improved, employment has increased and there are some signs of a modest pick-up in private investment”.

"We continue to see the RBA on hold with rates at 1.5%. Governor Lowe nominated four key factors to watch: overseas developments, the next CPI print (26 October), the housing and labour markets," say ANZ Research in response to the event.