More Australian Dollar Weakness Forecast

We believe the Australian dollar could weaken further.

The Aussie dollar is seen holding the lion's share of recent gains made in the wake of the August RBA policy meeting.

The central bank failed to explicitly communicate concern that the AUD was potenitally over-valued, as such markets have assumed they could be witnessing a bottom to recent declines.

This is however a risky view suggest ANZ Research who confirm they believe we have not witnessed a game-changer.

Nevertheless, the reaction by currency markets was notable:

• The pound to Australian dollar exchange rate conversion: Slumped from 2.1392 to 2.1088.
• The euro to Australian dollar exchange rate conversion: Fallen from 1.5014 to 1.4843.
• The US to Australian dollar conversion: Spiked from 0.7288 to a best of 0.7395.
• The Australian to New Zealand dollar conversion: Moved from 1.1109 to a best of 1.1207.

Be aware that the above quotes are taken from the wholesale markets - your bank will charge a spread at discretion when conducting international payments on your behalf. However, an independent provider will undercut your bank's offer, thereby delivering up to 5% more currency in many cases. Find out more.

This is Not the End of the Australian Dollar Decline

The RBA dropped the reference to the Australian dollar needing to fall further in the Statement following the monthly Board meeting. Everything else is identical to last month’s statement.

The cash rate remains at 2%, global financial conditions are accommodative, Australia’s economy is operating with spare capacity, and inflation will remain within the target zone over the next few

“It is highly unlikely that the RBA Board now suddenly feel that the Australian dollar is right where it should be or that it is at some ‘fair value’. More likely is that they believe that it is going to fall from here without their encouragement,” says Warren Hogan at ANZ Research in Sydney.

ANZ believe today’s events confirm the RBA is reasonably confident that the Fed will raise rates in the next few months and also may hint at some concerns around emerging market growth that they are not willing to voice explicitly at this stage.

“In any case, we do not believe that anyone should read today’s statement as being bullish for the Australian dollar other than to say that it reinforces our view that the RBA is on hold for the foreseeable future (rather than likely to cut rates anytime soon),” say RBA.

The fear of further interest rate cuts has certainly been a major factor in the AUD’s decline over recent months.

We do however note that there was little in the statement that pointed to further interest rate cuts from the RBA.

We get the sense that the RBA is happy with economic growth, and employment in particular, with the statement reading:

“In Australia, the available information suggests that the economy has continued to grow. While the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year. “

We could now be in for a period of consolidation in the Australian dollar complex.

This will allow our predictions for a break in the impressive GBP/AUD trend to come to fruition.

Watch developments in China and Australia data points for clues as to how long the period of consolidation persists.

Rally Represents a Short-Squeeze

Jeremy Stretch at CIBC suggests that the move higher in the Australian dollar represents a classic 'squeeze' as positioning from over-sold negative positions is rectified.

This could hit the AUD/NZD cross in particular:

"In the light of sizeable net AUD IMM shorts, more than double the one year moving average, while NZD shorts have been cut by around a third in the last two weeks suggests looking for AUD NZD to extend towards 1.1380 following a break through 1.1230/40."

CIBC argue that the change language does not suggest that the AUD trough has been seen, rather potential downside impetus should perhaps be tempered, such that those looking for a test towards PPP levels are likely to prove disappointed.

"In the near term we would expect AUD short covering to run out of momentum ahead of 0.7420," says Stretch.