Australian Dollar Forecast: It is Not All Over for the AUD Yet!

By Gary Howes

The Australian dollar is forecast to remain supported, despite the increased negativity we are currently seeing.

The Aus dollar (AUD) has attracted a fair degrees of attention in global FX on Thursday courtesy of some poor headline economic data.

The pound sterling has risen against the Australian dollar on Thursday as the exchange rate markets punish the latter for some poor economic news.

Today’s private CAPEX report provided the first estimate for firms’ 2014-15 capital expenditure intentions which was weaker than market expectations.

A look at the Aus dollar complex in late morning in London does however show the AUD has clawed back some of the losses:

Confirmation arrived overnight that Australian miners expect to cut back their investment spending sharply during the next financial year (July 1 2014 - Jun 30 2015).

"A decline had been expected but not on such a scale. The raw estimates – which admittedly are only informed guesses – anticipate a 25.2% y/y decline in mining investment. Looking at the track record of these guesses and adjusting accordingly softens the blow somewhat," says Gareth Berry at UBS.

But, all is not lost for the Australian dollar

So should we expect an entrenched decline in the Australian dollar exchange rate complex from here?

Not so argues Berry in a currency forecast note issued today:

"All is not lost for the Australian dollar. The fruits of the mining investment boom are likely to continue to boost export volumes to China over the coming year. Iron ore is already the chief export, yet there is still much more to come on that front.

"Ultimately that will push the trade balance deep into surplus territory, in our view. That should provide one prop of support for the currency, but the degree to which export values increase will depend on commodity prices too – and there the story is less encouraging.

To us, that means downside risks remain for the Australian dollar and we stand over our 3m AUDUSD forecast of 0.86 and our end-2014 forecast of 0.85."

For now Aus dollar challenges support

The short- to medium-term forecast is undoubtedly bearish argues an analysis presented by Luc Luyet at MIG Bank:

"AUD/USD is challenging the support at 0.8928. A break of this level would validate a bearish head and shoulders with an implied downside risk at 0.8775. Another support lies at 0.8874. Hourly resistances now stand at 0.8971 (intraday high) and 0.9049 (24/02/2014 high).

"The long-term technical pattern is negative and favours a further decline towards the key support at 0.8067 (25/05/2010 low), as long as prices remain below the resistance at 0.9168 (02/12/2013 high, see also the 200 day moving average)."