Aus Dollar Forecast: AUD is Overvalued But Don't Bet on a Swift Decline

Australian dollar (AUD) forecasts from a number of sources, the Reserve Bank of Australia included, confirm the currency is overvalued.

The implication therefore is it must ultimately move lower to a more balanced level leaving those looking to purchase AUD with better rates in weeks and months ahead.

The expensive Aus dollar received fresh attention at the start of December when the Reserve Bank of Australia (RBA) delivered its latest policy decision.

Rates were left on hold but the rhetoric on the exchange rate was strengthened, from the AUD “was offering less assistance than would normally be expected in achieving balanced growth in the economy” to “a lower exchange rate is likely to be needed to achieve balanced growth in the economy”.

The comments had the desired impact sending the Aus dollar lower.

At the time of this article's most recent update the following levels are witnessed:

• The British pound to Australian dollar exchange rate (GBP/AUD) conversion has edged up 0.36 pct on the previous day to hit 1.8728.
• The euro to Australian dollar exchange rate (EUR/AUD) is 0.44 pct higher at 1.4713.
• The Australian to US dollar exchange rate (AUD/USD) is 0.40 pct lower at 0.8373.

Be Aware: All currency quotes seen here are taken from the spot market - your bank will subtract a spread at their discretion. However, an independent FX provider will guarantee to undercut your bank, thereby delivering up to 5% more currency in some instances. Find out how.

No Interest Rate Hikes = A Weaker Aus Dollar Ahead

So with many an analyst telling us that the Aussie currency is eye-wateringly expensive, the question is what will push it lower?

Moderating growth momentum in China will be key. A recent slowdown in Chinese imports from Australia and combined with increasing supply, has pressured commodity prices lower thereby reducing earnings for Australia's all-important raw material exporters.

Consequently, sentiment towards AUD has deteriorated as reflected in a sharp shift back to net short speculative positioning in the currency over recent weeks, according to the CFTC IMM data. (Basically this data measures the intentions of speculative traders and is an accurate indicator of how markets are positioned with regards to future moves).

Then there is the RBA and interest rates which move in response to the underlying economy.

Global currency has been rushing into the Australian monetary system over recent years to take advantage of high-yielding interest rates, pushing up the Aus dollar in the process.

As rates are cut so this demand dries, and as rates are lifted so the currency rises to reflect and increase in demand.

ANZ Research have pushed back their forecasts for a RBA rate hike in 2015, an AUD-negative scenario:

"With global inflation low and domestic wages pressures absent, the moderate growth outlook will provide the RBA with scope to keep monetary policy accommodative for longer.

"We have recently pushed back the timing of the first rate hike by six months, and now expect the Bank will begin normalising rates at the end of next year."

As long as interest rates are kept at bay then the reasons for meaningful AUD gains are negated.  

ANZ Research have therefore lowered their forecasts on the AUD with a 2015 year-end AUD target moving from USD 0.85 to USD 0.82 and December 2016 target to USD 0.80.

Also backing the notion that the Australian dollar may move lower are Barclays who note that despite its recent decline, AUD remains expensive and their technical models indicate that AUD is around 14.9 pct overvalued.

On another technical measure Barclays estimate that AUD is around 8.5% overvalued.

Regardless of what measure is utilised we can see the currency is looking a little lofty.  

"Further weakness cannot be ruled out, especially given the various headwinds noted above, but the scope for further depreciation may be less significant than in past months, especially given that positioning has already become quite negative," says Kieran Davies at Barclays.

However Davies says that while further declines in AUD versus USD are likely he expects such declines to be gradual.

"As such we have revised our forecasts slightly lower to 0.83 by end June 2015," says Davies.

Aus Dollar: The Positives

Beware though, the Australian unit may not fall meaningfully in 2015.

Barclays see the following positives remaining supportive to the currency:

• While trading partner growth and Australia’s commodity prices have deteriorated further since the September quarterly, commodity export volumes remain well supported and are providing some protection to exporter incomes from falling prices.
• In addition, there are signs of strength in the domestic economy and our economist thinks consumption is likely to continue to recover strongly, helped by an improving labour market.
• Consumer sentiment has bounced back and retail trade grew 1.0% in Q3, after a flat Q2 driven by budget worries and a record warm start to winter.
• The positive wealth effect from housing continues to support consumption with housing market indicators remaining positive overall and house prices at all-time highs.

So while there is no shortage of forecasters warning that the AUD is overvalued there are actually a number of warnings that suggest a fall may not materialise.

Is a high AUD then a new normal?