What Do Analysts Think of the Aussie Dollar?
With the US dollar showing weakness over the past few weeks and with some volatility seen in European shares, the Australian dollar has had several economists rerating their expectations for the coming quarters.
Among those pessimistic on the currency, Westpac analysts have taken last month's Aussie dollar high of US81.35¢ as a level the dollar could trade up to but not beyond:
"The Australian dollar is likely to remain in a US78.50¢ to US80¢ trading range through next week, but Westpac continues to forecast further weakness in the currency as the year progresses. We expect to see the Australian dollar trading down around US73¢ by year's end."
On a slightly more positive note, the bank (according to FXStreet) said that the currency would be stable so long as the key 0.7788 level holds.
Analysts at VantageFX feel that a floor around 75c has shown to be quite a strong support level, which will be tested in the near future but has shown no signs of breaking yet.
“From a technical point of view, AUD/USD has found the 75c support level very hard to break, testing the zone unsuccessfully 5 times now.
Heading into FOMC on Thursday, it’s hard to see the level being broken in the near term but a Hawkish Fed will see that the bottom does at least get tested again soon” – Dane Williams (VantageFX)
A key pattern emerging is that analysts are recognising slowing momentum in the greenback over the last two quarters. This is put down to some disappointing economic data that on balance, could delay Federal Reserve rate hikes.
However, the majority of economists are predicting a swift return to US strength and see the Australian economy as continuing to underperform.
Todd Elmer, Currency Strategist for Citigroup also feels that last month's high of 81.35¢ in the Aussie dollar is little more than short-term relative strength and not the start of a new sustainable trading range:
“The Australian dollar is just selling off in sympathy with the New Zealand dollar... It is one of the most vulnerable currencies.”
UBS Chief Economist Scott Haslem is another analyst who forecasts weakness in the US dollar over the next few months; however, the consensus once again is that this is a momentary lapse. As a result, the Aussie is seen as a short-term play and not one with any lasting potential.
“We expect the Aussie dollar to produce strong numbers over the coming few months in light of US employment figures and Federal Reserve rate increases, but the US recovery certainly looks set to continue beyond this.”
In April, Australia recorded a highly surprising 3.9 billion Aussie dollar trade deficit according to official figures from Bloomberg.
Trade and account deficits look set to worsen over the next few years, with Goldman Sachs predicting that the current account deficit will increase to 5% of GDP by the end of the year.
Analyst Tim Toohey attributes this in part to a prolonged bearish period for iron ore prices over the next few years, as well as a "sharp rise in global bond yields from the start of 2Q2015".
This could lead to a reversal of recent improvements in Australia's net income position and is ultimately bearish for the currency.
Toohey goes on to state that the bank thinks iron ore prices will drop further from this level and “hit $40 per tonne in 2017” on the back of decreasing demand in China.
Recent inflation figures and disappointing wage growth have been compared with data not seen since the global financial crisis.
Kieran Davies, Chief Economist for Barclays, notes the deteriorating price inflation and states:
“We imagine that this would reassure the Reserve Bank of Australia that ongoing cost pressures are minimal even as the lower currency provides a one-off boost to inflation.”
As a result, Barclays are also bearish on the Aussie and even informed investors to sell the currency last week:
“Aside from an easing bias, we also expect the RBA to again make the case for further weakness in the AUD exchange rate given the state of commodity prices.
We are now looking for further downside in the near-term towards our initial targets near the 0.7530 year-to-date lows. “
Courtesy J. Samuels
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