Why the Aus Dollar Could be Poised for a Bounce

The Australian dollar (AUD) continues to depreciate drifting towards multi-year lows.

Indeed, such is the selling interest in the Australian currency that there are suggestions that parity with the New Zealand dollar will soon be reached.

"Latest reports from the Australian press suggest that many bank analysts expect the RBA to cut rates this year in response to a near 50% drop in commodity prices. Over in New Zealand meanwhile the housing boom has the RBNZ contemplating further rate hikes and resulting divergence in monetary policies has pushed the AUD/NZD cross to within 3 pennies of parity," says Boris Schlossberg at BK Asset Management.

Why the Aussie is Underperforming

What is driving the Australian dollar exchange rate complex lower at the current time?

ANZ Research point to a broad shift in perceptions about the distribution of risks in the Australian economy, and the continued better performance of the US and UK economies.

This has been highlighted by the divergence in short term rate markets pricing around likely action by the major central banks.

Above courtesy of ANZ Bank.

The below chart highlights that of the major economies charted; the US central bank is expected to hike its policy rate the most, followed by the Bank of England.

Australia is meanwhile predicted to enter an easing cycle - this explains the pound to Australian dollar exchange rate's rally back towards the 1.80 marker.

But Beware the Bounce

"As we move through January, it is critical that the fundamentals evolve in a fashion that justifies market expectations. Otherwise the AUD is poised for a bounce," warns Daniel Been at ANZ Bank.

Once currency pair at particular risk of a bounce is the AUD/NZD says Been:

"This divergence is also notable against the NZD. Here the AUD is trading back at historically low levels. While the divergence between the two economies is relatively large at present, it is not large enough to justify the current level of the AUD/NZD."

The Aussie Pairs: What to Watch

ANZ give the following insight into the various Australian dollar crosses:

• GBP vs AUD: As the BoE resolves what to do with rates the cross will be volatile. Strong fundamentals in the UK will drive GBP outperformance.
• AUD vs USD: Needs continued weakness in data to keep short term downside momentum. Decline in line with terms of trade and rising USD.
• AUD vs NZD: Need a change in the data dynamic to shift perceptions. Rebound as cross moves back towards historical averages.
• AUD vs EUR: QE is likely to be delivered in Europe and this should keep AUD/EUR pushing upwards. Lower as growth stabilisation and a current account surplus support EUR

ANZ Strategic Advice

Australian exporters should consider remaining unhedged, though future AUD depreciation is unlikely to be as sharp as that seen recently and some marginal consolidation is possible near-term.

Australian importers: Any further strength in the AUD could be used by importers to add cover. Levels around USD0.84 look attractive in our view.