National Australia Bank’s co-head of currency strategy wrote to clients this morning to say data from China and the Fed’s decision not to taper would mean a positive outlook for the AUD.
Another reason it increased its forecasts was the track it is predicting Fed Funds rates in the US to take.
Together these things justify increase of their December 2013 AUD forecast from 86 to 92 cents and from March 2014 from 84 to 90 cents.
Ray Attrill’s group wrote:
Our view now is that QE tapering is now highly unlikely to commence before December. The debt ceiling/US fiscal issue lies just ahead, and the Fed won’t have too much more to go on in its economic assessment next month other than September payrolls. So the prospect of another three months at least of current QE – and more chance of tapering occurring next year, than in October – looks set to keep EM currencies afloat and with that the AUD firmer than otherwise.
Supporting this they say their AUD/USD “fair Value” model sits currently around 94 cents.
But across town the FX Strategy team at the ANZ reckon this period of Aussie dollar strength might prove as ephemeral as every other one this year saying of both the Aussie dollar rally and rally in Australian yields that:
AUD RATES AND FX: LAST CHANCE
We think the relief rally in markets after the Federal Reserve’s decision not to taper its asset purchase program offers one final opportunity for borrowers to fix rates and to set FX hedges in the AUD at very attractive levels.
The key though is that both the ANZ and the NAB still think the Aussie will head into the 80-84 cent region by the end of next year. Like always though the speed and path of this expected Aussie Dollar depreciation is going to have a big impact on Australian growth and government finances in the year — and years — ahead.
Just a few weeks ago the Aussie dollar made a low of 0.8846 and was widely expected to stay around the 90 cent mark, before heading towards 80 cents early next year.
But that was before data from China — and other emerging markets — got better. And the economies in more developed markets begun to improve, with the RBA making it clear it was reluctant to cut rates further.
Currency forecasting is a witches’ brew, and if you put all these ingredients in, it was beginning to look as if the AUD was going to have a better time in the coming months. And that was before the fed decided to change tack and not taper, as the market was expecting.
The Aussie made a three-month high yesterday of 0.9524 – it’s back around 0.9450 at the moment. There has been such a shift that NAB has revised its forecasts to reflect the Fed’s decision, and its impact on the US dollar.