- The AUD/USD has rallied over 2% since early May.
- Currency strategists at the Commonwealth Bank think the lows for 2018 are now in, predicting the AUD/USD will finish the year at .7800.
- They say the US dollar will likely weaken in the coming months, assisting the Aussie’s move higher.
After bottoming at .7410 in early May, the AUD/USD has been on the charge in recent weeks.
It currently trades at .7582, up nearly 2.5% from May 9.
The recent reversal has got many wondering if this is just a dead-cat bounce after being sold aggressively since late January, or the start of a longer-lasting move higher.
Joseph Capurso, senior currency strategist at the Commonwealth Bank, thinks it’s the latter, predicting the AUD/USD lows for 2018 are now in.
“In our view, the fundamentals for AUD remain solid,” he says. “Consequently, we expect AUD/USD to consolidate in the 0.7400-0.7600 region in coming weeks and end 2018 high at 0.7800.”
Capurso says there are several reasons to remain optimistic about AUD/USD in the months ahead, citing fading trade frictions between China and the United States, a stabilisation in prices for Australia’s key commodity exports, and expectations that Australia’s current account deficit won’t balloon in the quarters ahead. He says the likelihood that the recent soft patch in the global economy — seen in recent economic data — is unlikely to persist.
Along with those factors, Capurso says the Aussie is likely to be supported by the other side of the AUD/USD equation — renewed US dollar weakness.
“[The] USD will re-weaken and support a higher AUD/USD,” he says.
“We expect the USD to re-weaken for a number of reasons: strong global growth is generally associated with a weaker USD; less monetary policy accommodation from other major central banks, which is not fully priced, will support a strength in other currencies; and the US current account deficit will widen further in part because the US tax cuts will spill over into higher US imports.”
He also says that interest rate differentials, something many believe has helped the greenback rally in recent weeks, including against the Aussie, aren’t likely to remain in the driving seat for long.
“There is limited upside to FOMC interest rate expectations from current levels,” Capurso says.
“The Fed Funds futures market is pricing two more 0.25% rate hikes for 2018. We agree with market pricing.
“Therefore, we do not expect the Australia-US two year bond spread to become much more negative in the remainder of 2018.”
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