The RBA’s cut last Tuesday and the material downgrading of its inflation outlook on Friday saw the Australian dollar lose around 5% peak-to-trough over the course of last week.
In no small measure that changed inflation outlook, and what it says about further rate cuts and the absence of rate hikes anytime soon has been a game changer for forex strategists who are once again focused on the AUDUSD falling below 70 cents.
Over the weekend, Morgan Stanley reiterated its call for the Australian dollar to fall to 65 cents by the end of 2017. Today UBS’s economics team in Australia issued a note stating the bank retains its “forecast for the AUD/USD to drop back to 0.68 by end-16”.
That the Aussie dollar remains pressured is a view shared by the Ray Attrill, the NAB’s global co-head of FX Strategy, and his team. In the bank’s Global FX Strategist publication Attrill wrote:
“Australia’s Q1 inflation data, the RBA’s response, and new SoMP inflation forecasts that leave markets confidently pricing in a 1.5% Cash Rate, bolsters our confidence in AUD returning to below 0.70 later this year.”
The NAB’s year-end target is 0.6900 against the US dollar before it dips down to 67 cents by September 2017.
The NAB says there has been a fall in its measure of AUDUSD fair value from 77 cents to 74 cents in the last fortnight. That’s been driven “more from domestic interest rates than it has from either the slight pick up in volatility/risk aversion or the fall back in key Australian commodity export prices”.
Attrill said “other than knocking a cent off our June 2016 AUDUSD forecast, from 0.74 to 0.73”, the changed outlook for RBA interest rates simply left the bank “a bit more comfortable” with it’s existing AUDUSD forecasts for the next 12 months.
But further out they have lowered their forecasts materially.
“Whether or not rates are cut are lowered further in coming quarters, our view that a tightening cycles is not going to commence before 2018 at the earliest means we adjusting our medium term forecasts,” the NAB said. “These now see a low in the mid/high 0.60s in mid-2017 (0.67 by September 2017) and not returning to above 70 cents until the latter half of 2018.”
There’s an old saying that the Australian dollar goes up the stairs and down the elevator. Last week’s collapse proved that once again.
So the chances are high that given the speculative market is still mega long the Australian dollar, that any further falls precipitate a wholesale unwind of long positions, which could precipitate a fall in the Aussie faster than the NAB or other forecasters expect.