Australian Dollar Forecast to Resume Downtrend After Post-RBA Knee-Jerk Strength Dies

The Aus dollar (AUD) surged higher in early March as the Reserve Bank of Australia (AUD) opts to keep interest rates unchanged.

• “This suggests the risk is that the $A moves slightly higher in the very short term” – Forecast from Ivan Colhoun at NAB.
• Wednesday saw GDP growth of 0.5% q/q and 2.5% y/y in Q4 reported - "suggests the economy remains weak. Today’s national accounts report does very little to change the tone of the recent data." - Felicity Emmett at ANZ.
• "Corporate bids have been very solid between .7750/70 and buying any dips towards there makes sense to me." - Sean Lee at ForexTell.

The Australian currency kicked off what promises to be a busy month in the blue as markets bought the AUD in response to a decision by the RBA to keep interest rates unchanged.

Going into the meeting markets were split 50/50 as to whether a second rate cut of 2015 would be delivered.

The relief-rally we are seeing will however ultimately run into resistance as all eyes now turn to May for an interest rate hike.

We look at the Australian dollar’s outlook in this piece and note that while the overwhelming viewpoint is a negative one, there remains the possibility that rude short-term bouts of strength could catch those with an interest in the currency by surprise.

Conversion Rates for Aussie Dollar

For reference, below are the spot Aus dollar rates following both the RBA decision and the release of GDP figures:

• The pound to Australian dollar exchange rate (GBP/AUD) is trading 0.12 pct lower on a day-to-day comparison at 1.9629.
• The euro to Australian dollar exchange rate (EUR/AUD) is converting at 1.4227. The pair is a further 0.50 pct lower.
• The Australian to US dollar (USD/AUD) exchange rate is converting at 0.7830.

NB: The above quotes and graphic representations are taken off the wholesale markets. Your bank will affix a spread at their discretion when passing on currency. However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Find out more.

Post-RBA Strength Seen in Aussie

The marke priced in around a 50% probability of a 25bp rate cut, in the end the RBA Board decided to leave the cash rate unchanged at 2.25% following the monthly board meeting.

The RBA retains a strong easing bias using the terminology of ‘time being’ and indicating that ‘further easing of policy may be appropriate over the period ahead’.

After starting a new easing cycle in February, Barclays correctly predicted that the RBA will very narrowly favour keeping rates on hold at 2.25% in March.

“Our expectation is that the RBA will cut again in May, although there is a very clear risk that RBA brings forward the rate cut to next week given that the latest capex survey unexpectedly revealed a dismal outlook for non-mining investment in 2015-16,” says a note from Barclays.

Even if RBA holds the rate, Barclays also see the RBA strongly signalling an easing bias, while indicating its desire to see the AUD falling further on a trade-weighted basis.

This should limit any upside bounce in AUDUSD.

"We believe they will act on this easing bias at the next meeting in April," says Warren Hogan pointing to further uncertainty between the major forecasters as to the timing of the next move.

Short-Term Strength Could Run Further Than Many Expect

Beware, the current counter-trend strength could run further says Sean Lee at ForexTell who has looked deep into the market before and after the RBA decision:

"There was a pop in the AUD/USD just prior to the RBA rate decision and this occurred because all the big local players and prime brokers pulled their bids and offers out of the market around 30 seconds prior to the announcement.

"With existing shorts at quite extreme levels, I don’t think it will take much to drive this market back towards .80 cents.

"Corporate bids have been very solid between .7750/70 and buying any dips towards there makes sense to me."

Forecasting Australian Dollar Strength in the Short-Term

NAB are calling potential Aussie dollar strength in the near-term following the decision to stay on hold.

Ivan Colhoun, analyst at NAB, says:

“This month’s meeting is slightly more than 50% priced and given the short time between board meetings, the obvious momentum in auction clearance rates and the lack of fast-moving or large negative developments in the economy in recent months, we are happy to bet against the view of a very quick follow up rate cut.

“This suggests the risk that the $A moves slightly higher in the very short term.”

However, NAB remain convinced, alongside the majority of analysts, that the longer-term picture is AUD-negative.

“Medium term, we continue to expect developments in US interest rate markets to be negative influences for both the $A and for Australian term yields,” says Colhoun.

The Strengthening US Dollar Will Undermine the AUD

While the RBA and soft economic data could continue undermining the A$ we note another external factor could play its part.

ANZ Bank say they see the continued advance of the US currency as being a long-term headwind to the Australian currency.

In a note to clients Daniel Been at ANZ Bank says:

“Global foreign exchange flows continue to shift in a fashion that suggests the USD uptrend is becoming more structural.

“This change has significant implications for the AUD. It will be an important influence on direction over and above the trajectory of the domestic economy.”

Studies by ANZ note that the shift out of holding Australian dollars will pick up steam as global money demands more USD as the US Fed raises interest rates.

“This will mean that the AUD will trade in a fashion more aligned with fundamentals and thus, will continue to decline in our view,” says Been.

ANZ remain structurally bearish on the AUD, targeting USD0.74 by December 2015.