Citi analysts are forecasting that the Australian dollar will hold above US80 cents in the medium-term as broader US dollar weakness continues.
The Citi team also said that market expectations on interest rates and stronger commodity prices will support the AUD against its US counterpart.
Still, when the it comes to the near-term outlook for AUD/USD Citi said that the recent fall in the US dollar index “trumps all”.
“Indeed, with the factors which have driven USD lower likely to remain in place for the time being, some further upward drift from AUD/USD above 0.80 appears likely,” Citi said.
US dollar weakness has been driven by weak data flow and the postponement of pro-growth fiscal policies, which in turn have led to a more cautious tone on interest rates by the US Fed.
In Citi’s view, that overrides the downside pressure on the AUD following recent speeches by both Governor Lowe and Deputy Governor Debelle of the RBA, which talked down the prospect of any imminent rate increase in Australia.
The analysts note that after those speeches, the Aussie dollar is still trading above the level of last Tuesday’s RBA minutes which were considered more hawkish in nature.
“Interest rate expectations are unlikely to move into (significantly) negative territory because risk for a cut is even more remote, so there is only small room for further compression to undercut AUD,” Citi said.
The analysts also predict that the recent bullish price action in industrial metals has further to run. Iron ore has climbed from a low of $US53/t to back over $US70/t on the back of stronger steel demand in China.
Citing the recent strength in the sector, the technical strategists on Citi’s team included a bold call on the Aussie if commodity prices continue to rally.
“If base metals continue to rally as we expect, a re-test of the historically pivotal 0.95 area may be seen,” they said. Now that would be impressive.
Despite that, they noted an interesting divergence between the Aussie dollar and the G10 economic surprise index.
The AUD is known as a risk-correlated currency so it generally moves higher when developed economies are performing well, which creates more of a risk-on appetite.
Recently though, a run of softer data has seen the economic surprise index fall while the Aussie dollar continues to outperform:
So, should that be taken as a warning sign or are the current moves the start of a long-term break in the correlation?
“We think this divergence has the ability to continue especially if we were to see continued price appreciation in the metals complex, but there is still a meaningful chance that this relationship reignites,” Citi said.
On the technical side, Citi said that key level for the AUD is 0.8012. That’s the 200-day moving average for AUD/USD, and if the Aussie can close this week at that level it could provide the platform for a meaningful break higher.
“For now, the ultimate targets will remain a work in progress but overall we are of the bias that higher levels in AUDUSD are likely to materialize over the medium term on the back of further gains in the industrial metals space,” Citi said.