Australian Dollar Forecast to Fall to 0.66 at End of 2016; Westpac's Callow

Fed action and further weakness in commodities cause are likely to cause a depreciation in the Australian dollar next year.

Higher expected U.S interest rates are a further factor likely to weigh on the AUD/USD pair according to Westpac's Sean Callow in Sydney.

The forecast comes as the Australian dollar trades with a firm bias on global FX markets.

Westpac's callow is one amongst a number of analysts who suggest strength in the Australian dollar, and its cousin the New Zealand dollar, is not sustainable.

“We expect ongoing increases in U.S interest rates fairly steadily through next year and that’s likely to support the U.S dollar on a range of crosses, as its pretty rare for a central bank to be raising rates next year, so part of the aussie decline that we expect to the 66  67 cents is likely to be due to the U.S dollar, but also because of commodity prices still under pressure, with Iron Ore at its lowest price since 2002-3, making it difficult for Australia in terms of export revenues, and that is also likely to contribute to the Aussie slipping to 66-67”

However, the strategist added that he saw the AUS/USD bottoming out at that level as the Australian economy started to show steady growth:

“66 cents may end up being about as low as it is likely to get during this cycle, with the Australian economy looking stronger as the year goes on.”

Bullish in the short-term

The Westpac strategist was bullish in the short-term, due to a December Fed rate hike already being priced in and recent strong Jobless data which hit a 19-month low.

In the short-term Callow - who was interviewed for Dukascopy TV - saw the pair potentially rallying up to highs of 73 -74 cents, however, at those levels it would encounter resistance from a re-balancing effect:

“When it gets to high 73’s and 74’s it is likely to feel the renewed weight of falling commodity prices and it will start to struggle from excess supply and lacklustre demand.”

Outlook for RBA Policy

The strategist saw chances of another RBA rate cut as still very low, citing market based indicators which were pricing in just a 20% chance of a cut at the bank’s next meeting in February.

However, he said a very low inflation reading before the meeting could tilt risks in favour of another rate cut:

“What we are likely to get before the next RBA meeting is a very low reading of inflation, with core inflation at about 2.0% - at the bottom of the target band for the RBA’s target range, and if they are concerned about the global economy then they will have scope to ease, however, our base case is that they will remain on hold.”