Australian dollar: Pound Sterling forecasted at 2, But Has Recent Aus Dollar Sell-off May Have Gone too Far?

Modified: Tuesday, 16 December 2014 15:57 GMT
Written by: Gary Howes

Australian dollar exchange rates (AUD) failed to get a boost from the much-watched Chinese GDP data released overnight but markets continue to forecast ever-lower levels in the Aus dollar.

China GDP grew at 7.7% in 2013, much the same as 2012. Industrial production YoY came at 9.7% for December vs. expectation of 9.8% while retail sales YoY for December came in line with expectations at 13.6%.

Last week’s disappointing Australian employment figures gave the GBP/AUD rate the boost it needed, with levels breaching 1.87.

Meanwhile, broad-based Sterling strength continues to ensure the forecast for the pairing remains biased towards the upside.

Aus dollar exchange rates today

The pound sterling to Australian dollar exchange rate (GBP/AUD) is trading 1.29 pct higher at 1.8602.
The euro to Australian dollar exchange rate (EUR/AUD) is 1.55 pct higher at 1.5499.
The Australian dollar to US dollar rate (AUD/USD) is 1.5 pct lower at 0.8783.
The Aus dollar to New Zealand dollar (AUD/NZD) is now 1.13 pct lower at 1.0575.

Note: Our AUD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

Australian dollar exchange rate: Concern over China rarely far from the surface

In Australia, the higher securities inflation pushed AUDUSD from 0.8757 (day low) to 0.8804. The soft Chinese data kept the upside limited.

The Australian dollar weakened during the course of 2013 under the weight of three key forces: a broad-based dollar advance, policy uncertainty in China, and the need for domestic rebalancing at home.

2014 has begun in a similar vein with each driver taking turns to apply further downward pressure. The start of Fed tapering has already hurt.

"Looking further ahead, Australia’s capex survey due on Feb 27th is likely to inflict further damage, as it quantifies the speed at which the mining investment boom is receding. In the meantime, although investor concern over China is rarely far from the surface, the next two weeks are likely to further test investors’ nerves, to the detriment of AUD," says Gareth Berry at UBS.

UBS fixed income strategists have warned that China’s money markets are likely to become increasingly unsettled as we countdown to the Lunar New Year on Jan 31st.

"It’s already happening. Money market interest rates drifted higher overnight, and the Shanghai Composite index dropped through the key 2000 level for the first time since August 1," says Berry.

Forecast for pound sterling vs Aus dollar

The British pound retains a positive bias on Monday morning and this could feed into a pound to Australian dollar exchange rate at 2 says a morning currency market brief from Investec:

"GBPUSD opens today in the lower 1.64s while GBPEUR is just shy of the year's high of 1.2150. Another notable winner has been GBPAUD as AUD hits 4 year lows against the USD. GBPAUD has continued to rally hard with 2.0000 starting to move into sight as a longer term target."

Sasha Nugent at Caxton FX is forecasting a move higher in the near-term:

"The rate is currently at 1.8675, but a return to trading at 1.87 is still within reach. We expect the Australian dollar to remain on the back foot."

Forecast for AUS dollar exchange rates today

"We think the nominal bond market and the yield curve have moved too far in response to one weak labour force print, especially considering the volatility of this report and the fact that the labour market lags economic growth. Recent evidence shows stronger tailwinds for the economy from the housing market, retail spending and a broadening of the US economic recovery, which typically all supportive Australian growth across time," warns Riki Polygenis at ANZ Research suggesting that the market could be due a correction.

Lloyds Bank: "AUD/USD made new lows last week after the employment numbers came in much weaker than expected. The report has also raised market concerns about potential RBA rate cuts, with the market now pricing in a 60% probability of a 25bp cut by August (chart 1). While the labour market remains weak, we doubt this would be sufficient to prompt a rate cut by the RBA, especially with AUD now at lower levels. AUD/USD has somewhat found a base, you've got Q4 CPI numbers out on Wednesday, a firmer print could well prompt a modest correction.

Swissquote Bank forecast: "Trend and momentum indicators signal the end of the upside correction; the MACD to consolidate in the red zone for a close below 0.8875. After having hit 8-year low of 1.0543 last week, AUDNZD recovers to 1.0674 following news of earthquake on New Zealand’s north island. The bias remains on the downside; the next targets are placed at 1.0500 (psychological level) then 1.0432 (2005 low)."

"As a reaction to last week’s decline, the immediate risk appears to be for a short-term recovery which should be limited to resistance at 0.8883. The broader potential remains for a test of strong support at 0.8545." - Gareth Berry at UBS.