Why the GBP and USD are Forecast to Advance Against the Australian Dollar

The Australian Dollar (AUD) is forecast to fall in value against the British Pound and US Dollar, amongst others, on the back of negative flows, valuations and risk to the rebalancing of the economy.

In this article we hear from analysts at Danske Bank on the outlook for the AUD and note that the all-important question for the currency remains how the Australian economy and labour market handle the drop in mining investments.

"Although signals have been mixed, important measures such as retail sales and consumer confidence suggest a rugged transition from a commodity-based economy to a more diversified model," notes analyst Kristoffer Lomholt at Danske Bank in his latest AUD forecast note.

First though, a look at the exchange rate market, for your reference, shows the US dollar has shot higher, and the commodity complex has slumped on news that the FOMC appears on-track to raise rates in mid 2015:  

• The pound to Australian dollar exchange rate (GBP/AUD) is 0.36 pct lower than seen at last night's close at 1.8148.
• The euro to Australian dollar exchange rate (EUR/AUD) is 0.56 pct lower at 1.4292.
• The Aus to US dollar exchange rate (AUD/USD) is 0.52 pct higher at 0.8838.

Note: If you are looking for a higher rate ensure your FX provider has put the relevant buy and stop-loss orders in place to ensure you get the right rate when it is hit, find out more here.
Note 2: The above levels, and all rates quoted here, are from the inter-bank markets - your bank will affix a spread at their discretion when passing on a retail rate. However, an independent provider will seek to undercut your bank, thereby delivering up to 5% more FX in some instances. Please find out more.

Why the Australian Dollar Has More Downside In Store

Lomholt gives us they key factors that will likely add to AUD pressures in coming months:

The labour market is one area that will likely keep the currency under pressure. It is noteworthy that technical factors have added considerable uncertainty to the reliability of the recent labour market statistics which have normally been important measures for the Reserve Bank of Australia (RBA).

The RBA kept its cash rate target unchanged at the October meeting. Inflation is currently at the upper 3% bound of RBA’s inflation target. However, the rise in inflation has been driven by the 2013 AUD weakness, which suggests that inflation will pose less of a barrier for the RBA in cutting rates going forward.

Flows. The latest IMM reports reflect a general change in sentiment towards AUD with investors having consistently added bearish builds over the past five weeks. Non-commercial AUD positioning has consequently returned to the stretched short levels seen last year, suggesting a higher sensitivity of AUD to the upside.

Valuation. Fundamentally, AUD remains overvalued with a Danske Bank PPP model estimate of c.0.78.

Risks. The downswing in the mining investment boom could turn out to have more severe effects on the economy than expected. This would prompt an easing bias from the RBA as the 2013 effects of a weaker AUD fall out of the yearly inflation rates. The AUD remains exposed to global risk sentiment. El Niño weather later this year could spell trouble for the economy.

As a result Danske Bank maintain their view that the RBA will leave the cash rate target unchanged over the coming 12 months.

Over the past month the market has tilted the 12M pricing of RBA from a likely single rate hike to a 20% probability of a rate cut; if this grows further expect further pressure on the AUD.

"We believe this pricing is fair given the risk that falling mining investments and a weak labour market may turn out to be more severe than currently perceived. Despite the significant AUD sell-off experienced in the past month, we believe that AUD/USD has more downside in store," says Lomholt.

Specifically, Danske expect commodity prices (e.g. iron ore prices) and a slowdown in China to weigh on the AUD leg.

"In the short term, we may see some correction in the USD leg but fundamentally we still expect growth outperformance, relative monetary policy and the USD’s role as an asset currency to pull AUD/USD lower. We, therefore, keep our targets unchanged at 0.86, 0.85, 0.84 and 0.83 for 1M, 3M, 6M and 12M, respectively," says Lomholt.

Technically Speaking, the Longer-Term Looks Soft

Where is the Australian dollar heading next? According to a recent technical analysis supplied by Luc Luyet at Swissquote Research the near-term offers the best bet for AUD sellers to get better rates:

"AUD/USD has shown some strength as can be seen by the break of the short-term declining channel. Monitor the test of the hourly resistance at 0.8833. A key resistance stands at 0.8897. Hourly supports can be found at 0.8788 (intraday low) and 0.8719.

"In the long-term, the underlying trend is negative. Despite the recent successful test of the strong support at 0.8660 (24/01/2014 low), the long-term technical structure favours further decline. A key resistance stands at 0.9112 (16/09/2014 high). Another strong support lies at 0.8067 (25/05/2010 low)."