ANZ Bank is bearish on the Australian dollar -- here's why

  • The Australian dollar has proved resilient to a deterioration in investor risk sentiment recently.
  • ANZ says that reflects the opposing forces of higher commodity prices helping to offset a widening in interest rate differentials compared to the US.
  • ANZ says the Aussie remains a “sell on strength” currency at present.

The Australian dollar remains a “sell-on-rallies” prospect, says ANZ Bank’s FX Strategy team led by Daniel Been.

ANZ says the currency is being driven by two opposing forces right now — negative and widening interest rate differentials to the US and stronger commodity prices which have supported Australia’s terms of trade — helping to explain why the Aussie hasn’t fallen all that far despite a deterioration in risk sentiment in recent months.

The opposing forces from interest rate differentials and commodity prices are evident in ANZ’s rates and commodities models.

The latter suggests the AUD/USD should be around .8500 while the former says it should be trading below .7000, keeping it essentially stuck in the mid-70 cent region.

ANZ Bank

However, while those contrasting forces have helped to cushion the Aussie’s latest slide, ANZ suggests the risks moving forward appear slanted to the downside.

“With no yield support, in a world moving towards monetary policy normalisation, and with only minor upside on the commodity front, domestic data is likely to play second fiddle in influencing the AUD,” it says, adding that its high-beta nature most likely means it will be at the mercy of the global risk environment.

“On this front, risk sentiment remains fragile.

“The escalating trade war between the US and China doesn’t bode well for the Australian economy and cyclical currencies in general.

“Further, in a world where global growth continues to weaken and Trump-related uncertainties are a constant, it is hard to bank on a sustained risk-relief rally”.

ANZ Bank

As such, ANZ says it remains bearish on the outlook for the Aussie dollar.

“We continue to see it as a ‘sell on strength’ currency,” ANZ says.

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