Australian Dollar Forecast: AUD to Eventually Weaken by Lloyds BUT TD Securities Predict AUD Will be Supported

Australian dollar strength, despite a dovish RBA and collapse in key commodity prices, continues to have many in the market scratching their collective heads. Why is it that the AUD continues to defy expectations for it to head lower?

On Wednesday, the AUD is seen at the following levels:

• The British pound to Aus dollar exchange rate is 0.05 pct lower at 1.8163.
• The euro to Aus dollar exchange rate is 0.04 pct higher at 1.4518.
• The Australian dollar to US dollar rate is unchanged at 0.9336.

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TD Securities forecast the Aus dollar to remain supported

The AUD speculative net long has turned sharply higher, reflecting investor appetite for yield as sentiment shifted to global central banks keeping rates lower for longer.

The drop in highly rated sovereign yields has lifted the demand for the higher yielding AUD, and also explains why the NZD has outperformed.

Also supporting a stronger AUD was Australian trade data for April released last week showing exports to China near record levels assisted by the record volume of iron ore exports.

Annette Beacher at TD Securities says she is predicting the AUD will remain elevated:

"Till now, the focus on iron ore has been on price, not volumes, but if volumes drop in tandem with prices, this should cap rallies in the AUD. That said we don’t see an immediate trigger for a corrective move lower in AUD.

"An offset to these commodity trade flows is offshore interest in AUD assets and the ECB’s move to relax monetary policy and infuse liquidity.

"These factors should both be AUD positive, but we suspect these factors alone are not enough to drive the AUD towards parity. Rather, we expect the AUD to range trade around $US0.92-94 for now, before trending lower towards US$0.90 on a strengthening USD."

Lloyds Bank Research forecast the Aussie dollar to decline

On the other side of the fence are Lloyds Bank Research whose forex analysts are forecasting declines ahead:

"Weakness in key commodity prices is eroding a major area of support for the currency, but this is offset by relatively high interest rates.

"Stronger than expected Q1 GDP growth has reinforced expectations that interest rates have bottomed, but the currency
is only slightly higher on this.

"Cutbacks in mining investment and the public sector remain major headwinds. Consumer and business confidence took a knock following May’s Budget and this could show up in a data fade.

"With the rebalancing of the economy still having further to run, and tight fiscal policy and a strong exchange rate headwinds to growth, we expect monetary policy to remain loose. These factors are likely to undermine the AUD. We forecast AUD/USD to fall to 0.86 by mid-2015."

Sunday market news roundup

RBS hatches rescue plan for Ulster Bank: Royal Bank of Scotland is in talks with the American private equity giant Warburg Pincus about a radical plan to inject new cash into the taxpayer-backed lender’s troubled Irish operations.

Chinese Premier flies in with £18 billon to paint the town red: Two giant Chinese investment funds are to set up shop in Britain in the wake of this week’s visit by premier Li Keqiang.

Property giants bid for stake in Bluewater: Two property giants are battling for a £600 million stake in Bluewater, the retail complex in Kent that has more than 300 shops.

Eastern Europe on alert amid fears of new banking crisis: Several eastern European nations are working on plans to set up “bad banks” amid mounting fears that a financial crisis could engulf the region.

A topping contender: The American buyout giant TPG has emerged as a contender to buy Pizza Express in a deal expected to value the restaurant chain at more than £1 billion.

Asian tycoon eyes train set: Li Ka-Shing is exploring a bid for a company that owns a third of Britain’s trains.