St. George Bank's Australian Dollar Forecasts See GBP-AUD Above 2.0

The British pound is tipped to break above the 2.0 level against the Australian dollar in convincing fashion in 2015 say forecasters at St. George Bank who also see the AUD coming under fresh pressure against the US dollar once more.

The Australian dollar continues to slowly, yet surely, lose ground against the pound sterling with the two interest rate cuts delivered thus far in 2015 taking their toll. A look at the charts confirms the GBP-AUD pair is on course for an eventual re-test of the 2.0 level with momentum indicators advocating for further gains.

It’s not just the pound that will do well against the Aussie currency say forecasters, the broader Australian dollar exchange rate complex is expected to come under pressure on a “softer outlook for the Australian economy, the likelihood of another domestic rate cut in the near-term and downside risk to commodity prices,” according to St. George Bank in their most recent currency forecast note to clients.

Dominating the outlook for the AUD family will be moves in the all-important AUD-USD exchange rate. The AUD-USD has recently strengthened from a low of 0.7533 which was achieved in April. We are now at higher levels in May – despite a second interest rate cut – with 0.81 being achieved.

This is important as the Reserve Bank of Australia (RBA) remains sensitive to the values of the A$ and will want to see it lower to boost the export economy. On Monday the 18th we heard in a speech delivered by RBA Deputy Governor Lowe that a further fall in the AUD would be helpful, confirming the Bank’s view that fair value in AUD-USD is at 0.75.

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Decision makers could therefore very well cut interest rates again, such a move would surely sink the AUD as many in the markets are not yet pricing in another cut during 2015.

“A more subdued domestic outlook helps to justify a weaker exchange rate. The lower currency would boost demand from overseas as exports become more competitive at a time when demand domestically is lacking,” says St. George Bank.

This view was echoed by Lowe who in the already-mentioned speech said a sustained lift in non-mining investment seems "some way off".

Another likely driver of a weaker A$ are commodity prices – the Australian economy still remains reliant on key exports such as iron ore, coal and oil. When commodity prices are high the economy and Aussie dollar benefit from the higher profits generated from this sector. The currency has however lost ground as commodity prices fell over recent months.

While prices have stabilised there is no real evidence that the corner has been turned with the only way being up for prices.

“Increases to supply, which is expected to continue, and risks to global demand suggests that the prices of Australia’s key commodities could remain under pressure. Further declines in the prices of commodities would continue to weigh on the Australian dollar,” say St. George.

However, the Australian dollar has already fallen significantly in step with the decline in commodity prices in recent months and St. George do caution that much of the declines are reflected in the current levels of the AUD.

In addition, the stimulus from Europe and Japan similarly could keep the Australian dollar higher than otherwise against the yen and the euro, and suggests that the Australian dollar could depreciate to a lesser extent in trade-weighted terms, compared to its decline against the US dollar.

The pound to Australian dollar will likely maintain an upward trajectory as the Bank of England enters an interest rate raising cycle which will boost the GBP. The Aussie dollar will also lose out to the US dollar as the US Fed starts raising rates – currently expected to begin in September.

The GBP v AUD exchange rate is forecast to rise to 1.9880 in June, 2.0533 in September and 2.0833 in December 2015.

The Aud v US dollar exchange rate is forecast to hit 0.75 in June, 0.74 in September and 0.73 in December.

For a fuller insight into the exchange rate forecast profile currently held at St. George Bank please see below: