AUD: Aussie Rising Short-Term But Long-Term Bearish
Against all the odds the Aussie has been strengthening short-term, but can it keep up the momentum?
The Australian dollar is appreciating - particularly against the dollar - shrugging off, expectations that a widening policy divergence between the U.S Federal Reserve and the RBA would produce greenback strength versus the Aussie'
According to Dr Duru, a contributor, to Investing.com:
“The Australian dollar weakened for just one full day in the wake of the rate hike from the Federal Reserve. AUD/USD has now bounced back and is trading above its 50-day moving average (DMA) again.”
The pair now looks poised to attack the October and December double top highs, rather than falling to the September multi-year lows:
“AUD/USD has even reversed most of its post-Fed losses. Moreover, the Australian dollar is nowhere near its recent lows; the current bounce marks a third higher low from September’s multi-year low. The main outstanding question now is whether overhead resistance will hold at the Oct/Dec double-top and/or the declining 200DMA.”
According to St George Economics a bounce in crude combined with China stimulus hope have further supported the currency :
“The Aussie dollar and the New Zealand dollar both strengthened against the US dollar as the oil price edged higher and amid hopes of fiscal stimulus in China. AUD/USD rose from a low of 0.7182 yesterday morning (Tuesday 22nd), to a peak of 0.7249 and is currently trading at 0.7230.”
Bears giving up
Data from Oanda’s commitment of traders is showing Net Speculative Shorts have eased up substantially for the Australian Dollar:
“Speculators may be supporting this resilience. These traders have been in retreat on their net short positions against the Australian dollar since peak bearishness in mid-November. Now, traders are essentially net neutral.”
Markets cool to FOMC trajectory
Weakness in the dollar may be due to an increasing divergence between market expectations about the pace of Fed rate hikes next year, which are pricing in 2 rate hikes, and the FOMC’s projections from the December FOMC dot-plot, which is indicating an average 100 basis point rise – or four 25 basis point hikes.
According to Dailyfx’s Ilya Spivak this is putting downward pressure on the greenback:
“Investors’ priced-in bets envision two rate hikes next year, whereas Chair Yellen and company expect to issue four. This means that markets may be more sensitive to an upside surprise that forces re-pricing of dovish bets versus the alternative. The Aussie and Kiwi may find gains swiftly capped in this scenario, while the US Dollar moves broadly higher.”
However, the analyst puts the current kick higher down to increased stimulus hopes for China’s a major consumer of Australian commodities:
“The Australian and New Zealand Dollars outperformed in overnight trade.
"It is tempting to flag hopes for Chinese stimulus expansion as the catalyst for the advance.
China’s official Xinhua News Agency reported that leaders called for more “forceful” fiscal policy and more “flexible” monetary policy to foster appropriate conditions for structural reforms at the government’s Central Economic Work Conference.”
BOE on hold; GBP/AUD remains pressured
It is roughly the same story with GBP/AUD since the Bank of England is seen as one of the central banks closest behind the Fed in the tightening cycle, with several major bank analysts predicting the BOE to hike rates as soon as May – however, even these expectations have been delayed recently by doubts about the pace of wage increases, persistent commodity price deflation and Brexit fears.
Even previous arch-hawk Martin Weale, who stood out with fellow dissenter Ian McCafferty as voting for earlier rate rises, has shifted his stance in the light of new data showing inflationary forces slowing, saying the factors pushing down on inflation had become a “bit more prolonged” and offered the BOE more “breathing space.”
He was concerned in particular about wage growth:
"I initially thought that the weak wage growth was a wobble that represented stray numbers that you get once or twice from time to time.”
However, he went on:
“There has plainly been something more to it than that.”
Iron Ore Bouncing on the Floor
Another factor supporting the Australian dollar recently has been the rebound in Iron Ore, Australia’s single most important commodity export:
“Iron ore prices are now bouncing off multi-year (historic) lows set on December 11th. Iron ore is back to prices last seen on December 3rd.”
According to Business Insider, Iron Ore futures were on the rise:
“near-dated Chinese iron ore futures rose strongly yet again in overnight trade.
According to pricing from the Dalian Commodities Exchange, the January 2016 contract rose by 3.08% to 335 yuan.”
Neverthless the commodity remains in a long-term down-trend.
Longer-term outlook not so positive
Most analysts remain bearish the Aussie longer-term.
Westpac’s FX strategist Sean Callow, for example, see’s short-term rebound for the aussie post-FOMC finally giving way to a dominant U.S dollar theme during 2016 as expectations build for the next Fed rate hike, and weak commodity prices continue to exter downwards pressure on the currency:
“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,” Callow said in a recent interview with Dukascopy TV.
Dr Duru is also bearish longer-term:
“However, I fully expect that the new year will bring back strategic and even longer-term positioning in preparation for an eventual fresh downward run for the Australian dollar.
“The “Reserve Bank of Australia (RBA) has already made its dovishness clear.
"The RBA has not been as direct and forthright as other dovish central banks about the desire to ride policy divergence to a weaker currency against the U.S. dollar, but the Bank appears to expect Fed rate hikes to do some of their heavy lifting of currency devaluation.
Australia still needs this devaluation to counter-act the on-going decline in the terms of trade from plunging commodity prices.”
Specifically, in relation to commodities, there appears no end to forecaster’s prepared to make even lower calls on key aussie commodities such as Iron Ore.
The country’s own Department of industry and Science revised down its forecast for Iron Ore in 2016, in its recent December quarterly review:
“The world's biggest iron ore exporter cut its price forecast for next year by 19 per cent as supplies continue to swell and slowing growth in China hurts demand in the biggest user.
“Prices will average $41.30 a metric ton in 2016 compared with $51.20 forecast in September, Australia's Department of Industry & Science said in a quarterly outlook Tuesday.
The department cut its average price for 2015 by 4.7 per cent to $50.40 a ton.”
Whilst pressure from central bank policy divergence appears to be easing on the aussie, the main other factor contributing to its valuation, commodities, remains a unknown, with many forecastsers seeing no end to the weakness, as 2016 progresses.
