Credit Suisse Cuts Australian Dollar Forecasts after RBA Sighted on Road to Nowhere

Since September the Dollar has fallen and a host of other factors have created little incentive for the RBA to suddenly pick up the pace at which it moves toward an interest rate hike.

The Australian Dollar could still rise against the greenback over the coming months, according to strategists at Credit Suisse, although its scope for gains has been reduced since the Reserve Bank of Australia was seen being diverted onto a road-to-nowhere last week.

Credit Suisse strategists cut their three and 12 month forecasts for the AUD/USD rate Wednesday in response to recent disappointing inflation figures that could see further downward pressure on Aussie bond yields - which is bad for the currency.

“With last week’s inflation print disappointing forecasts and failing to accelerate, the risk for markets is that the RBA’s “on hold” stance continues to bleed into the short term interest rate curve and price out rate hikes even further into the future as time goes on,” says Honglin Jiang, a currency strategist at Credit Suisse.

Data released last week showed Australian inflation rising at an annualised rate of 1.8%, a disappointment for markets given economists had forecast headline inflation to return to the lower bound of its 2% - 3% target for the first time in two years.

Core inflation, which removes many of the more volatile items from the consumer price basket, was equally disappointing, suggesting that underlying inflation pressures remain missing in action down-under.

“We had previously argued on September 13 that with the RBA firmly on hold and in no mood to countenance market speculation of blindly following its global peers into a tightening cycle, investors would be best served seeking opportunities elsewhere,” Jiang notes.

Chart showing the AUD/USD rate at daily intervals.

Investors and traders might have been wise to take the hint. The RBA has now left the cash rate unchanged at 1.5% for fourteen months in a row and, since September, the Dollar has fallen while a host of other factors have created little incentive for the central bank to suddenly pick up the pace at which it moves toward an interest rate hike.

“The RBA’s triple mandate that emphasizes full employment and “economic prosperity” somewhat dilutes the importance of any given inflation print, given Governor Lowe’s broad interpretation of his mandate,” says Jiang. “But the other indicators that the RBA watches to guide its decisions have not been convincingly arguing for a rate hike.”

Ongoing weakness in wage growth, iron ore prices that have lagged a broader commodity upturn and a housing market that has begun to cool without further intervention from policymakers all detract from the case for an interest rate hike.

“Thus, the “burden of proof” for rate bears to make the case for hikes appears long and highly unlikely to be fulfilled soon,” Jiang concludes.

Jiang and the Credit Suisse team have cut their three month AUD/USD forecast to 0.7800, down from 0.8100, which implies reduced upside of 1.6% for the pair in the short term.

Jiang forecasts the AUD/USD rate will return to the same level in 12 months time, which represents a downgrade from her earlier forecast of 0.8200.

“This retains a marginally USD bearish bias in line with most of the remainder of our forecast set, while also reflecting some specific AUD negative developments that reinforce the idea that investors should look elsewhere for convincing currencies to be long of,” the strategists summarises.

The Australian Dollar was quoted at 0.7670 against the US Dollar, up 0.13% on the session, shortly after the London close Wednesday. Meanwhile, the Pound-to-Australian-Dollar rate was bid 0.39% lower to 1.7281.

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