Australian Dollar: 2 Reasons Why Falls are Currently Being Forecast for AUD

We hear from a number of analysts as to why the AUD could be due to weaken while another analysts warns that this may not be the case.

Ahead of the analysis, here are the spot market rates at the weekend:

• The Australian Dollar to US Dollar Exchange Rate (AUD/USD): 0.9317.
• The Euro to Australian Dollar Exchange Rate (EUR/AUD): 1.4231.
• The Pound Sterling to Australian Dollar Exchange Rate (GBP/AUD): 1.7811.

Note that those waiting for better exchange rates should not hesistate, ensure your FX provider has the relevant buy order in place for when your rate is achieved. Likewise, if there is a threshold you are not willing to cross to the downside ensure stop-loss orders are in place. Please learn more here.

After very strong growth in Q1, the Australian economy is entering a period of slightly below trend growth of between 2.5% and 3.0%.

Is this reason to predict a weaker A$? No says one analyst.

Two Reasons for Forecasted Aus Dollar Weakness

The Reserve Bank of Australia (RBA) is widely tipped to keep interest rates at current levels in coming months with RBA Governor Stevens saying he does not believe lower rates will materially boost economic activity.

RBA Governor Stevens said in his speech earlier in the week that the Australian economy needed an injection of confidence rather than lower interest rates.

So why then is the Aus dollar forecast to soften by Nomura. Analysts at the bank tell us the following drivers matter:

1) the outlook for US yields and its impact on flows into AUD assets; US yields are expected to start rising as the period of cheap money comes to an end in the United States. The Fed could raise rates as early as Spring 2015 eroding Australia's yield advantage.

2) the needed convergence of the AUD toward weaker commodity prices. As such, a model linking the value of the AUD to relative prices, commodity prices, rates differentials and risk appetite, suggests that the AUD should trade around 0.85.

"A depreciation in the currency would also mean weaker returns or even losses on foreigners’ holdings of AUD assets, which would also reduce the inflows. However, continued M&A related inflows could provide some support to the currency. As result, we expect the AUD to gradually depreciate for the rest of the year, and even end the year slightly below 0.90," says a note on the matter from Nomura.

Forecasting Pound Sterling to Remain Supported

The British pound to Australian dollar exchange rate (GBP/AUD) has had a tough few weeks but appears to have settled.

With little further event risk pencilled in for the remainder of August we are predicting the pair to tread a sideways range.

Longer-term we hear that Kamil Amin at Caxton FX is expecting the sterling to Aussie rate to appreciate:

"He (stevens) also warned that the risk of the Australian dollar dropping to lower levels was underestimated. With uncertainty still surrounding the outlook for the Australian economy and the RBA lowering its growth and inflation forecasts, we expect to see the Australian dollar remain vulnerable to further downward pressure."

At the same time Amin concedes that data out of the UK has failed to regain some consistency since Q1, and we have therefore seen sterling bulls cut their long positions.

"Next week could prove to be crucial from a sterling perspective, especially with so few economic releases out of the region. Whenever there has been a lack of support for sterling, we have seen the currency's downside remain vulnerable," says Amin.

The wildcard: The Australian economy improves faster

The gist of this article concerns the week outlook for the Aus dollar going forward.

It is with this in mind that we take note of the view at ANZ Research who reckon the non-mining sector could yet provide support to the Aussie:

"There have been tentative signs of improvement in the non-mining sectors of the economy, with business conditions and confidence increasing further over recent months.

" Moreover, the most recent NAB quarterly business survey (which includes mining companies but is more heavily weighted to the non-mining sector), showed a further improvement in firms’ capital expenditure intentions. Our In Focus article this week outlines our expectation for next week’s private CAPEX release. Importantly, we expect a modest upgrade to non-mining firm’s investment intentions for the 2014-15 financial year."

Aus Dollar Week Ahead:

In Australia, the focus will be on the Q2 CAPEX survey.

The key uncertainty for the Australian economy as it navigates the transition away from mining led investment growth is the pace and magnitude of the upswing in non-mining business investment.

"While the last CAPEX survey showed a solid improvement in non-mining investment intentions, overall they remain relatively subdued, and continue to point to only a modest 6% y/y increase in non-mining investment in 2014-15," say ANZ Research.

However, tentative signs of improvement in the non-mining sectors of the economy continue to emerge, with business conditions and confidence increasing further over recent months.

Later in the week, following last month’s surprise bounce, private sector credit is expected to have posted slower, yet solid, growth in July (+0.5% m/m compared with +0.7% m/m in June).