Australian Dollar “Looks Like a Good Buy” say Societe Generale

-AUD/USD a good buy at current levels, says Societe Generale. 

-AUD/USD could see 7% upside before year end, say UOB Bank.

-Pound-to-Aussie could see 8% downside in 2018, say UOB Bank.

© AlexanderZam, Adobe Stock

The Australian Dollar has remained on the back foot this week despite a broad rebound in risk assets, but one strategist at Societe Generale says the currency looks like a good buy for speculators at present levels, while other forecasters are suggesting it could rise notably over coming months.

Australia’s Dollar has posted the worst performance against the US Dollar out of all developed world currencies since the end of January, a period that has seen the market scarred by persistent disappointment over economic data that has seen investors become more pessimistic in their outlook for Australian interest rates.

A further deterioration of sentiment toward the Aussie has come almost in lockstep with a double digit decline in iron ore futures prices and periodic increases in risk aversion across financial markets. All are factors that still hang in the air above the Aussie but nonetheless, some are willing to take a punt on the currency.

“In both Asia in February, and in Spain last week, I have been taken to task for expecting the AUD to rally (modestly) from here. But it's holding above 0.77, remains in a long-term uptrend, and has weathered both weaker commodity prices and a collapse in expectations of a 2018 RBA hike,” says Kit Juckes, chief foreign exchange strategist at Societe Generale. “It looks like a good buy with a 0.77 stop to me, here.”

The AUD/USD rate was quoted at 0.7709, down 0.58%, during noon trading in London Tuesday. It has fallen some 5% from the 0.8126 peak it saw during late January and is down by around 1.27% for the 2018 year to date.

This week’s call comes closely on the heels of a February upgrade to the Australian Dollar outlook by Juckes and the Societe Generale team, who said the currency should best the rest of the developed world basket through till year-end, citing a number of reasons.

“AUD tends to benefit during global cyclical upswings due to its positive link to base metal prices. A second related point is Australia’s significant trade ties with China, making AUD a proxy for Asian EM exposure. While inflation pressures remain subdued, the mining sector investment bust is now mostly behind us and employment growth has been very strong in the past year,” Juckes wrote in a February note to clients.

The takeaway from this was that markets had been overly pessimistic about the Australian economic growth outlook and were, as a result, underestimating the prospect of a Reserve Bank of Australia interest rate rise some time later this year. This may well turn out to be the case but, so far, economic data and commodity news only appears to have reinforced the market’s pessimistic view of the Australian economy and its Dollar.

Figures released earlier in March showed Australian GDP growth coming in at 0.4% for the fourth quarter of 2017, down from an upwardly revised 0.7% in the third quarter, and beneath the 0.5% growth expected by economists and markets. Annual GDP growth came in at 2.4%, down from the 2.9% seen in 2016.

This, combined with a poor four-quarter wages report, has led markets to give up any hope of an interest rate rise in 2018. Pricing in interest rate derivatives markets now implies it will be May 2019 before the Reserve Bank of Australia raises its cash rate from the current record low of 1.5%.

Moreover, prices of iron ore futures traded on China’s Dalian Commodity Exchange have dropped by more than 21% since late February, to CNY 442.2 on Tuesday. However, strategists at UOB Bank in Singapore wrote to clients this week saying these downside pressures are unlikely to last and that the AUD/USD exchange rate can recover over the coming quarters.

“The sluggish local economy, coupled with benign inflationary outlook and slow wage growth does justify the RBA’s decision to stay on hold. Despite a reluctant RBA, we continue to maintain a positive outlook for the AUD/USD. This is mainly driven by support from commodities,” says Quek Ser Leang, an FX strategist at UOB Bank.

“We believe that after the recent pullback, further weakness may be limited. Despite recent consolidation, key industrial metals and energy commodities remain supported due to on-going strong synchronized growth recovery. As such, we see mild AUD/USD strength ahead.”

The UOB foreign exchange team forecast the AUD/USD rate will rise to 0.79 before the end of June and that it will finish the year back at 0.83. They also predict the Pound-to-Aussie rate will fall by more than 8%, from Tuesday’s level of 1.83, to finish the 2018 year at 1.68.

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