Australian Dollar Outlook: AUD Rocked by Kent Comments But the Next Big Move Will Likely be Lower Warns Analyst

The Aus dollar (AUD) remains under pressure on global exchange rate markets in the longer-term. However, improving domestic conditions as reflected through stabilising RBA rate expectations by the money markets will continue to deliver bouts of strength.

Analysts have confirmed to us that the currency remains susceptible to external factors at the current time, such as weak commodity price developments and rising Fed rate expectations.

Near-Term Strength

While the longer-term picture is argued to be negative in this piece, we note that near-term the risks appear to be higher for the Aussie.

Apart from generally better looking risk appetite levels, the AUD has been underpinned by the improving November readings of the Westpac consumer confidence indices.

"Slightly positive risk appetite dynamics may impart marginal support to the AUD in the near term with US-centric dollar headlines taking a backseat for now," says Emmanuel Ng at OCBC in Singapore.

A look at the Aus dollar today shows:

• The British pound to Australian dollar exchange rate (GBP/AUD) is 0.35 pct lower at 1.8037. Sterling has taken a hammering on signs that UK interest rates will only be lifted towards the end of 2015.
• The euro to Australian dollar exchange rate (EUR/AUD) is 0.04 pct lower at 1.4262.
• The Australian dollar to US dollar exchange rate (AUD/USD) is 0.21 pct higher at 0.8737.

Please note that the above quotes will be subject to a discretionary spread by your bank, it can vary wildly from the market rate. If you are looking to make international payments we suggest being quoted by an independent provider. By tapping the wholesale markets they can offer up to 5% more currency in some instances.

Furthermore, you should avoid negative currency moves by ensuring the correct risk controls are in place, learn more.

Australian Dollar Hit by Heavy Volatility

Looking at recent action in the AUD we see the complex has seen hightened volatility in the past 24 hours after RBA Assistant Governor Christopher Kent mentioned the prospect of intervention in a Q&A session after a speech in Sydney.

"The AUD/USD immediately tumbled more than 60 points as headlines crossed the news wires but the pair quickly stabilized and retraced all of its losses after traders had a chance to fully digest Mr. Kent's statement," says Boris Schlossberg at BK Asset Management.

Kent spent a considerable amount of time explaining why growth remained below trend, attributing the weakness to slowdown in mining, an overvalued currency exchange rate and ongoing fiscal consolidation.

It is these observations that have prompted many to deliver negative forecasts on the AUD moving forward (see below).

When asked about the prospect of intervention Kent stated that, " We haven't ruled it out. It's still there as an option if needed." This was a rather mild repetition of Governor Steven's position on the issue which essentially reaffirmed the long standing RBA policy on freedom to intervene should the central bank deem it necessary to do so.

"One of the key provisions for such a policy move is that the currency must be at either an extreme over or under valuation. Given the fact that the RBA did not intervene at when AUD/USD was 1.0800 it is unlikely that the central bank would step in at .8800. Thus upon further reflection Mr. Kent's comments were seen as simply another attempt at jawboning by RBA and Aussie quickly regained its footing," notes Schlossberg.

The Australian Dollar's Long-Term Outlook - Weaker

Australia is a formidable player in the global supply of commodities with the country being found in the top three producers of iron ore, nickel and bauxite since the mining boom really took off in the mid 2000's.

Mining contributes about 5.6% of Australia's Gross Domestic Product at the current time.

So with commodities playing such an important role in the economy we can expect commodity prices to exert influence on the currency.

"Unless global growth momentum picks up more considerably, it appears unlikely that commodities will start to stabilise. This is especially true as global central banks’ more aggressive monetary policy stance is not regarded as sufficient to compensate for lower liquidity conditions as related to the Fed’s more hawkish policy stance," says Manuel Oliveri, FX Strategist at Credit Agricole.

Accordingly Credit Agricole advise against buying the AUD around current levels as they see little reason for upside impetus in the value of the currency to be found at the current time.

However, it must be noted too that increasing speculative short positioning has been making the currency subject to the risk of a correction higher.

"From that angle patience may be needed before considering selling the currency anew," says Oliveri.

The Australian to US dollar exchange rate (AUD/USD) hit a 52-month low last week on the back of commodity price weakness and two separate reminders by the RBA that it still considers AUDUSD to be overvalued.

The pound sterling to Aus dollar (GBP/AUD), by contrast, remains well elevated compared to its recent valuations over the course of the past 3 years.

Greg Anderson at BMO Capital tells us that he sees more losses for the Aussie dollar ahead:

"The RBA has made it abundantly clear that it doesn’t expect to move its base rate any time soon (presumably not until after the Fed hikes) so that theme is now less of a driver.

"With the potential for moves in AUD rate expectations quieted, AUDUSD is likely to be almost entirely driven by metals prices and the US 2Y yield in the week ahead. Chinese data may also have an impact.

"Australia has no first-tier data due out in the upcoming week and the only thing that could be considered 2nd tier is a speech by the RBA’s Kent on Thursday.

"We think a consolidation between 0.8550 and 0.8700 is likely for the week. We think the eventual break of that range will be through the bottom."