CBA: We doubt the Australian dollar can rally much further

Photo by Mirco Lazzari gp/Getty Images

Fuelled by renewed strength in the Chinese yuan against the US dollar, a rebound in stocks and further gains in crude oil, the Australian dollar continued to rocket higher on Friday, closing at it highest level since July 2 last year.

For the week the Aussie rallied 1.65% against the US dollar. Combined with the prior week’s 4.38% advance, the two-week percentage increase was the largest in almost five years.

As the chart below reveals, supplied by Deutsche Bank, some of the Aussie’s gains have been fuelled by traders adding to bullish bets that the currency will continue to strengthen.

Based off the most recent commitment of traders report released by the US Commodity Futures and Trading Commission, net Aussie dollar longs rocketed to 29,000 contracts as at the close of business last Tuesday, a significant turnaround from the net 60,000 short positions held by traders at the start of 2016.

As at 8.15am AEDT, the AUD/USD currently buys .7543, down 0.26% for the session. Weak Chinese economic data released over the weekend, along with profit-taking following such an immense rally, has contributed to the modest fall seen in early Asian trade this morning.

While the momentum for the Aussie has been entirely to the upside in recent weeks, Elias Haddad, currency strategist at the CBA, doubts that the Aussie can rally “much further this week”.

“Softer Chinese economic data batch released over the weekend adds to global growth concerns,” says Haddad. “Also, the RBA meeting minutes will likely reiterate the conditional easing bias.”

Looking ahead, monetary policy decisions from the Bank of Japan and US Federal Reserve, along with Australia’s jobs report for February on Thursday, will likely be influential on the Aussie’s movements in the coming days.

“We think the FOMC could trim its near-term US economic growth outlook and signal a slower pace of rate increases,” says Haddad. “Nonetheless, the Fed funds rate normalisation path will be well ahead of market pricing which will continue to support USD.”

CBA economists expect the Fed will hike interest rates again by 0.25% in June, meaning that “Australia-US interest rate differentials will not widen in support of a much higher AUD/USD”, according to Haddad.

He also expects that the Bank of Japan will refrain from adding additional monetary policy stimulus at its latest meeting ending tomorrow.

Here’s the current Aussie dollar scoreboard.

  • AUD/USD 0.7543 , -0.002 , -0.26%
  • AUD/JPY 85.92 , 0.10 , 0.12%
  • AUD/CNH 4.8896 , 0.0006 , 0.01%
  • AUD/EUR 0.6770 , 0.0008 , 0.12%
  • AUD/GBP 0.5243 , 0.0001 , 0.02%
  • AUD/NZD 1.1210 , 0.0023 , 0.21%

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