2014 Australian Dollar Forecasts: TD Securities March Update Confirms the Worst May be Over for AUD

By Will Peters

The Aus dollar (AUD) exchange rate complex is forecasted to enjoy the support of the RBA in coming months say analysts at TD Securities who have updated their 2014 exchange rate forecasts.

March has thus far seen a strong perfomance delivered by the Aus dollar, a string of decent economic releases has put some fight back into the currency.

In addition, the Australian dollar has so far resisted attempts by the Reserve Bank of Australia to talk down the currency following the release of the March policy decision.

The talk confirms the RBA would like to see lower Aus dollar rates; however that the currency has remained resilient confirms the worst could be over for the Australian dollar.

UPDATE: Wednesday saw the Aus $ bid higher on news that Australian GDP beat expectations by printing at 0.8% versus 0.7% eyed. Does this outturn confirm the Australian economy has seen the worst pass? If so, then expect a more resillient currency.

A look at the latest FX rates shows:

Australian dollar: Forecasts suggest stability

The outlook for AUD and NZD is rather neutral as we expect positive domestic developments to be offset by the gradual rise in USD-supportive, long-term rates over the balance of 2014.

This viewpoint is that held by the team at Canada's TD Securities who do think there is a window for the AUD to reverse its trend decline against the NZD in the months ahead.

Analyst Cristian Maggio says:

"The NZD has discounted the risk of tighter monetary policy from the RBNZ later this year but we feel the AUD OIS curve is underpricing the risk of the RBA nudging rates a little higher in the next few months as emergency levels of accommodation are no longer required. We think this should facilitate a recovery in the AUDNZD cross to levels nearer 1.09."

Better growth prospects mean the odds of further accommodation remain vastly diminished and we are beginning to see some separation among central banks such as the RBA and BoE where rate hikes are now likely at some point over the next twelve months.

The RBA may hope that US tapering may provide added insurance to their recovery via a weaker currency, but there is no appetite to lean against the probability of a rate hike by the end of this year.

"That puts AUD at a competitive disadvantage relative to its commodity cousin, the CAD," says Maggio.

It is the opinion of TD that Australia and New Zealand both remain on track for rate hikes.

For the RBNZ, hikes look imminent; we expect to see a 25bp increase in the cash rate on March 12th with additional 25bp hikes fol-lowing each quarter this year.

"In both cases, we look for a flatter curve by year-end. In Australia we continue to favour 3s10s flatteners with a target of 105 bps, and our long Canada/short Australia 3-year position (Feb 2017s for both legs) still has a long way to run (target: -210 bps)," say TD.

Aus / US dollar forecasts

1 AUD will likely buy 0.88 US dollars in Q1 2014.
1 AUD will likely buy 0.88 US dollars in Q2 2014.
1 AUD will likely buy 0.87 US dollars in Q3 2014.
1 AUD will likely buy 0.87 US dollars in Q4 2014.

Australian Dollar / NZ Dollar forecast

1 AUD is predicted to convert into 1.09 NZ Dollars in Q1 2014.
1 AUD is predicted to convert into 1.10 NZ Dollars in Q2 2014.
1 AUD is predicted to convert into 1.12 NZ Dollars in Q3 2014.
1 AUD is predicted to convert into 1.13 NZ Dollars in Q4 2014.

Euro to Australian dollar forecast

1 EUR will buy 1.51 Aus dollars in Q1 2014.
1 EUR will buy 1.44 Aus dollars in Q2 2014.
1 EUR will buy 1.43 Aus dollars in Q3 2014.
1 EUR will buy 1.40 Aus dollars in Q4 2014.