Market volatility is low and commodity prices are rallying, and given recent weakness in the Australian dollar, ANZ thinks now is the time to buy the battler.
“The AUD has fallen significantly in recent weeks as iron ore underperformed and market rate differentials narrowed,” says Daniel Been, head of FX Research at ANZ. “We think that these factors are set to become more supportive again and, alongside positive risk appetite, should drive the AUD higher.”
On recent concerns about the outlook for the Australian economy, a factor that has contributed to the Aussie’s slide, Been says markets have become too pessimistic, suggesting it’s unlikely to see the Reserve Bank of Australia (RBA) make any significant changes to its GDP growth and inflation forecasts.
“While the recent inflation and retail trade figures did disappoint, we do not think that either of these will drive a shift in the RBA’s tone as the broader growth environment in Australia remains solid,” he says.
“Non-mining business investment is accelerating, government expenditure is providing a boost to GDP and the mining sector is now adding positively as well.
“These circumstances mean that the RBA’s tolerance of a weaker consumer is higher than it otherwise might have been,” he adds.
Nor is he concerned that Australia’s weak September quarter consumer price inflation (CPI) will see the RBA cut its view that inflation “is expected to pick up gradually as the economy strengthens”.
“We do not think that it is sufficient for them to markedly shift their forecasts,” he says.
Should the RBA maintain its present view, Been says it could prompt investors to question why they should sell the Aussie at these levels.
“We think that the market will be disappointed if the RBA does not sound incrementally more dovish,” he says. “Should this manifest, it is possible that the market looks around and realises that there are few other reasons to be bearish on the AUD at the moment.”
As such, Been says the risk-reward favours being long the Aussie given the current set of circumstances.
“We recommend buying the AUD/USD at 0.7650, with an initial target of 0.7900,” he says.
Been says that he will revisit this call should the AUD/USD fall to .7525. It currently trades at .7690.