ANZ believes the Aussie dollar rally has further to run

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Hot on the heels of predicting the Reserve Bank of Australia (RBA) will lift interest rates twice in 2018, ANZ has also adjusted its Australian dollar forecasts today.

The bank thinks it’s going higher, suggesting that a combination of RBA rate hikes, an improving global economy, a slower rate tightening cycle from the US Federal Reserve and favourable near-term environment for riskier assets will benefit the Aussie in the months ahead.

“Since we last revised our forecast there have been two key changes in the outlook,” said Daniel Been, head of FX research at ANZ.

“First, the prospects for the Australian economy have improved. While, second, on the global front, broad conditions for the USD have deteriorated.”

While Been says the prospect of RBA rate hikes will underpin the Aussie, he says its impact will be “somewhat limited because the cycle will be very shallow and a move of this magnitude has largely been accounted for by investors”.

Higher interest rates have already been factored in by financial markets, in other words, something Been says “should add no more than a couple of cents to the AUD”.

Adding further support to the Aussie, Been says that subdued inflationary pressures in the United States means that it’s increasingly
unlikely that the US Federal Reserve will be able to tighten significantly faster than the RBA next year, keeping the spread between Australia and US bond yields in positive territory.

“The Fed continues to be stuck between a rock and hard place,” says Been.

“While the economy is punching out some of the strongest broad-based activity numbers, inflation remains the missing piece of the puzzle. Recent communication suggests Fed’s officials are becoming concerned about this disconnect.”

Along with yield differentials, Been says that stronger global economic conditions should also benefit the Aussie, acting to keep financial market volatility supressed and underpin commodity prices.

As such, Been has made significant near-term upward revisions to his AUD/USD forecasts, predicting that the AUD/USD will rise to 83 cents by the middle of next year, representing a massive 11 cent increase to his previous forecast of 72 cents.

Source: ANZ

However, as seen in the forecasts above, while Been says there’s a bit more upside for the Aussie to come, he still thinks it will weaken substantially in the second half of 2018.

“We continue to think that over a longer time horizon, risk appetite will once again come to dominate markets as tighter liquidity starts to bite. This will be outright negative for the AUD,” says Been.

“The net result is that this is a period in which to remain nimble. We continue to advocate picking up the pennies as the last of this cycle plays out. But, for medium-term players, patience is key. We do not advocate entering bullish positions from current levels but feel that bearish investors could be frustrated for some time yet.”

The AUD/USD currently buys .8013.

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