ANZ has swapped sides on Australian currency amid surging commodity prices and no longer thinks the Aussie will slump against its US counterpart.
The bank has also shifted its trading advice and now thinks it’s better to buy the dips or fall in the currency rather than aggressively sell rallies in the Australian dollar.
The Aussie has rallied 6% this year against the greenback and is the best performing currency in the basket of G-10 country currencies. The Aussie has been a beneficiary of iron ore’s surge to its highest level since August 2014. From lows in mid-December 2015, the metal has rallied by over 140%.
“While we continue to think that the Australian dollar is going to depreciate in line with a stronger US dollar over the forecast horizon, the scale of the depreciation in our forecasts looks too large,” Daniel Been ANZ’s head of foreign exchange research said in a note. “Commodity prices have risen more than anticipated, liquidity remains ample and volatility is expected to remain in check. “
ANZ now expects the Aussie to reach 78 US cents by the end of March, 4 cents higher than their previous prediction and fall to 72 US cents by the end of 2017, compared to its earlier forecast of 68 US cents.
This table shows the bank’s old and new forecast
The Aussie’s valuation has also corrected, Been said, and this would provide it some protection relative to other cyclical currencies in the event of any deterioration in global sentiment.
ANZ said last month that the greenback was overvalued.
ANZ’s analysis, shown in the chart below, reveals the USD’s strength was only taking away one cent from the Aussie now compared with about 6 cents in previous strong US dollar cycles.
It wasn’t all positive though with ANZ expecting commodity prices to decline along with an economic slowdown in China, the primary consumer of the metal. As China’s tightening efforts start to take effect, it will show up in weaker commodity prices in the second half of the year and drag the Aussie, Been said.