Australian Dollar Forecasts: Bank of America Warn RBA To Recommence Verbal Assault on AUD

Bank of America Merrill Lynch have updated their exchange rate forecasts for 2014 with a warning on the likely trajectory of the Australian dollar.

Analysts at Bank of America Merrill Lynch have warned that the Reserve Bank of Australia could recommence its verbal assault on the Aus dollar following a recent rally which continues today.

The viewpoint is communicated as BofA issues its latest forecasts for the exchange rate market place.

It is worth noting that the Australian dollar forecasts issued by BofA do however see a lower AUD/USD exchange rate in the coming months of 2014, however it appears risks to the call are now being communicated.

Commenting on the outlook for the Aus dollar is Alex Joiner at Bank of America:

"There was a shift to a more neutral bias on the exchange rate also in the RBA’s statement.

"No longer was the A$ “uncomfortably high,” but the reference to it was more descriptive, “The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.”

"The RBA appeared satisfied with the decline in the A$ toward US$0.86, especially as it was heading towards the US$0.85 level RBA Governor Stevens outlined as appropriate given Australia’s economic fundamentals late last year.

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"However, the move to a more neutral bias has given the A$ significant support, and it has rallied more than 2 cents to be trading over US$0.8900 again. This has undone the RBA’s deliberate effort to talk the currency down over the closing months of 2013.

"As a result, the change in bias actually has made rate cuts more likely, especially if the A$ continues to appreciate. This would not have been the RBA’s intent, unless it is confident the A$ will decline through the remainder of the year.

"This is a confidence we do not share, and we expect the A$ will remain uncomfortably high for many trade-exposed businesses that would no doubt have liked it to fall further.

"Given this reversal, it would be no surprise to see the RBA recommence its verbal assault on the A$ in official and unofficial communications in an attempt to stem the uptrend."

RBA adopts a neutral stance

he RBA left the official cash rate at 2.50% at its February board meeting this week, as unanimously expected.

Yet in a significant signalling move, the text of the communication shifted marginally to a more neutral tone, at least for the short term.

The move looks prudent, particularly following today's confirmation that the business outlook in Australia continues to improve.

The Aus dollar has shot higher today after it was shown business conditions nudged higher again in January, cementing the solid upward trend.

"Low interest rates and the lower AUD look to be supporting businesses, with conditions in the manufacturing, construction and retail sectors continuing to improve. Conditions in all other industries declined, although this followed strong gains in the previous month," say ANZ Research.

The NAB measure of business confidence also rose in January, and remains well above the levels of the past few years. Putting aside the post-election spike in confidence in September last year, confidence is now at its highest levels since early 2011.

ANZ say:

"The ongoing improvement in measures of business conditions and confidence confirms our view that the RBA is on hold for the time being. The economy is clearly responding to lower interest rates and the lower exchange rate, as the pickup in housing market activity and retail sales suggests, however it remains unclear how the decline in resources investment will play out and to what extent non-mining investment spending improves this year.

"We continue to expect the RBA to keep its policy settings unchanged for an extended period and don’t expect an increase in the cash rate until Q1 2015."