AUD/USD Forecast to be Limited at 0.77: CitiFX

The Australian Dollar (AUD) is likely to see strength fade argue analysts at Citi.

Analysts at the world’s largest foreign exchange dealer, Citigroup, have told clients they believe the rally in the AUD/USD, in place for much of 2016, will soon fade.

The Citi Commodities Research team thinks the iron ore rally (the key Australian export to China) may be running out of steam.

Despite iron ore’s outstanding performance this quarter, the team maintains a bearish view on bulk commodities and on iron ore in particular with Citi's base-case for iron ore prices to average USD55/t in H2'16E before falling in 2017E to an average of USD45/t.

“This is likely to dampen sentiment in AUD at the upper levels,” say Citi in their Daily Currency Update not to clients.

This view is actually counter to that held in a recent report we have published on the matter here.

Analysts also warn that potential downgrades to Australian and New Zealand banks would likely anchor their respective currencies.

"Both AUD & NZD will note the downgrades to the outlook for Australian and NZ banks by Moody’s (last week) and S & P (this week) respectively. Such an outlook makes it more difficult for banks to pass on central bank rate cuts and which therefore likely adds further pressure on both the RBA & RBNZ to deliver more rate cuts," say Citi.

As a result, Citi believe the 0.7350 area continues to offer strong resistance in NZDUSD but with downside moves capped by the 50d MA at 0.7150 for now with the 0.73 – 0.77 range seen likely to contain AUDUSD overall.

More RBA Interest Rate Cuts

Expect further AUD weakness to be derived from the Reserve Bank of Australia's (RBA) desire to cut interest rates yet further.

According to Citi Economics, robust Australian markets won't distract the RBA from their agenda on lower rates/

A likely bottoming of wage growth and last week’s fall in unemployment does not rule out further easing by the RBA given there is no sign of wage rises picking up and that a wide range of factors are maintaining downward pressure on inflation and interest rates," say Citi.

Citi economists look for possibly 2 further 25bp rate cuts from the RBA & RBNZ and one 25bp cut
from the BoC (following Friday’s weak Canadian data) – this could unravel the “grab for yield” theme over time

ANZ Also See Top in AUDUSD

The call for a top in AUD/USD reinforces the view held by the team at ANZ.

ANZ say:

“While our forecasts show a gradual depreciation from there, we expect that AUD will trade with some volatility in a USD0.70- 0.78 range before breaking lower in the latter half of 2017.”

Given the uncertain nature of the timing of the depreciation, the current low level of volatility, and the skew present in the risk reversal, ANZ recommend using options to capture this range.

“We recommend buying a 6 month AUD/USD0.74/0.71 put spread and selling a 6 month AUD/USD 0.80 call at an indicative rate of AUD 24 pips,” say ANZ.