Australian Dollar Forecasts for 2015 At Risk of Downgrade Warn Bank of America

The potential for lower forecasts come following a particularly challenging period for the AUD in which it has lost significant ground on FX markets.

According to analysts, "fundamentals (particularly the balance of payments) would align for a big drop in 2015, but selling it close to 0.95 was always good risk-reward given our view that it would decline to 0.80 (AUD/USD) in 2015."

At the time of writing, however, we are seeing a rally in the AUD as recent weakness allows buyers to step into the market and pick up discounted currency:

• At the time of writing the euro to Australian dollar exchange rate (EUR/AUD) is 0.17 pct lower at 1.4424.
• The pound to Australian dollar exchange rate (GBP/AUD) is 0.81 pct lower at 1.8378.
• The Australian to US dollar exchange rate (AUD/USD) is 0.38 pct higher at 0.8771.

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Dowside Risks Rise

The falls in the Aussie dollar have clearly caught forecasters by surprise as they have been deemed to have been more excessive than expected.

The concern is "whether the price action presages a sharper drop in the AUD than we expect and earlier than 2015," say Bank of America in a note to clients.

"We are already around our end-2014 forecast of US$0.88. While the probability of a larger "front-loaded" drop in the AUD, say to 0.85, has risen, we remain comfortable with our once out-of-consensus, now conservative 0.88 target. Our US/China outlooks along with positioning and technicals suggest it is too early to expect a sizeable drop yet, despite the AUD’s still significant overvaluation."

Bank of America point out that they are sticking to 0.88 for 2014 and have 0.80 for 2015.

However, a big drop is predicted in 2015:

"We leave our forecast profile unchanged, expecting the AUD to end 2014 at 0.88, although the downside risks to this projection have risen.

"We continue to expect a much bigger decline in 2015 once resource investment, and associated capital inflows, slow sharply in 2015. The latest depreciation in the AUD is likely to be welcomed by the RBA but may not change its view that the exchange rate remains above most estimates of its fundamental value, particularly given the continued deterioration in Australia’s terms of trade."

But, Beware of Short-Term AUD Support

While the longer-term prospects for the AUD remain challening we must be aware that near-term strength is a possibility.

According to analysis from ING:

"Prices in AUD/USD are finding support at the horizontal line around 0.8690 after the steep fall in prices by completing the lower end of the trading range around 0.9205.

"A close above yesterday’s high at 0.8770 confirms the short-term recovery scenario within the downtrend, suggesting limited potential upside.

"The daily chart shows strong horizontal resistance coming in around the 0.8890 level. The daily chart could develop a short-term bottom formation below the horizontal resistance at 0.8890."