ANZ: The Australian dollar's slide isn't finished yet

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Despite a recent improvement in Australian economic data, heightened risk aversion and deteriorating market sentiment will weigh on the Australian dollar in the months ahead, taking the currency below the 70c level by year’s end.

That’s the view of ANZ currency strategist Daniel Been who has slashed his year-end forecast for the Aussie on the back of expected volatility created by emerging market uncertainty.

Here’s Been on the likely drivers of the Australian dollar in the months ahead.

“Further extensive downside in the AUD will be driven more by market dynamics than by fundamentals. On this front we continue to think the risks remain tilted towards further weakness. We have long highlighted the fact that the recent depreciation in the AUD has not yet taken into account the deteriorating risk profile of the economy, and that to adequately do this the AUD needs to undershoot fair value – as has been the case in previous depreciation cycles. Recent price action suggests this process is beginning”.

He also suggests that concerns surrounding China’s economy, rather than the likelihood of the US Federal Reserve raising rates later in the year, will weigh upon the Aussie.

“We are now in a world where three of the four BRIC economies are struggling to rebuild economic momentum and policy choices elsewhere in the emerging world are becoming more challenging”, says Been, suggesting “these challenges should continue to undermine the AUD due to Australia being intricately tied to the Asian region, and the volatility created by emerging market uncertainty will continue to undermine the appeal of the AUD as a carry currency”.

Been now sees the AUD/USD falling to 68 cents by year end. Further out, he expects it will slide to 67c by the end of the March quarter next year before it begins to “forge a very gradual base”.

The AUD/USD currently sits at .7120.

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