Australian Dollar Weakness Forecast in the Long Term

A new pair of 2015 - 2016 currency forecasts confirm the outlook for the Aussie dollar is ultimately negative.

Those watching the markets in the hope of a better Australian dollar exchange rate will be disappointed suggest forecasts issued by TD Securities and BMO Capital.

However, the opportunity to take advantage of recent strength in the short-term will be welcomed.

"The Aussie dollar got hoisted higher after a surprise jobs explosion spoke better about the economy’s underlying health and fanned skepticism over the need for further interest rate cuts. March saw a robust gain of 37,700 jobs which unexpectedly pulled the jobless rate down to 6.1 percent from 6.3 percent where it was forecast to stick," says Joe Manimbo at Western Union.

• At the present time the Australian to US dollar exchange rate (AUD-USD) is seen trading at 0.7792.
• The pound to Aussie dollar rate (GBP-AUD) is meanwhile noted at 1.9148.

Note that all FX quotes in this piece reference the wholesale markets rates - your bank will affix a discretionary spread to this wholesale rate to derive their profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances, learn more here.

Longer-Term Declines

The drivers of the weaker Aus dollar in the longer-term are many and varied, however it is the glacial growth in Australian GDP that will be the key driver.

An aggressive Reserve Bank of Australia (RBA) is cited as another.

We expect the pound to trend in a similar fashion to the USD against the Aussie over the course of coming months citing the fact that both the Bank of England and US Federal Reserve are about to enter a cycle of interest rate lifting.

“Sub-trend consumer spending, collapsing mining investment and the re-emergence of poisonous politics are overpowering any positive vibes from buoyant house prices and construction,” says Annette Beacher at TD Securities on the underlying negative conditions that should ensure domestic conditions keep the Australian currency on the back foot.  

When the prospect of higher interest rates in the United States are factored into the equation, the Australian vs US dollar is predicted to fall to 0.75 at the end of the year by TD Securities.

By September 2016 the rate is expected to be at 0.72.

There are similar views pertaining to the Aussie’s outlook held at sector peer BMO Capital.

“We expect AUDUSD to drop to 0.74 by the end of the quarter on the back of at least one more RBA rate cut,” says a note from Stephan Gallo at BMO Capital who have just updated clients with their most recent calls on the prospects facing the AUD.

The current trajectory being pencilled in for the Aussie complex is as follows:

Note that AUDUSD is being driven primarily by commodity prices at the present time.

The Chinese economy appears to be coming off the boil, this is significant as this market is the key export market of Australian commodity exports.

The soft trade data out of the economy this week knocked the AUD for six, confirming just how important the China/commodity sector dynamic is.

“We look for energy prices to eventually rebound a bit in H2 of 2015 but we’re not so sure about base metals,” says Gallo pointing to the uncertainty that is likely to persist.

When the Fed begins to hike, BMO think the RBA will take advantage of the opportunity to differentiate itself with harsh rhetoric against AUD and if that doesn’t move it below 0.70 then the RBA could cut right as the Fed hikes.

“When base rates are moving, they normally become the most important factor rather than commodity prices,” points out Gallo.

In one year from now the bank is forecasting the AUD-USD to be quoted at 0.70 as a result of these dynamics.

The full forecast table is seen here.