BAML predicts the Australian dollar will be the comeback kid of currency markets next year

  • The AUD/USD has tumbled over 11% since late January, and remains near multi-year lows both against the greenback and in trade-weighted terms.
  • Strategists at Bank of America Merrill Lynch (BAML) forecast the AUD/USD will finish 2019 at 84 cents.
  • It says recent weakness in the Aussie is “inconsistent with key commodity prices and the terms of trade”.

On the back of a less-hawkish US Federal Reserve, additional stimulus from policymakers to support the Chinese economy and firm commodity prices, UBS FX Strategists expect the Australian dollar will be trading at 82 cents against the greenback by the end of next year, representing an increase of 14% from its present levels.

It’s a big contrarian call compared to the broader FX market, and one that many think is unrealistic.

However, UBS is not the only forecaster predicting that the Australian dollar will be the comeback kid of currency markets next year.

According to strategists at Bank of America Merrill Lynch (BAML), the AUD/USD will finish next year at 84 cents, powered by stronger commodity prices and expectations the Reserve Bank of Australia (RBA) could begin to lift official interest rates far sooner than many think.

“We, like the RBA, still see the next move in rates as up,” BAML says.

“Current economic momentum suggests the risk is for an earlier challenge to current market complacency in RBA pricing. The strength of the economy provides significant fiscal flexibility for the Morrison government to underpin household incomes and broader spending ahead of the next election in the mid-year Budget update in December.”

Along with those potential economic tailwinds, BAML says record negative rate differentials between the US and Australia, slower Chinese growth, domestic political uncertainty and weakness in emerging markets across Asia have all acted to push the AUD to levels that look “inconsistent with key commodity prices and the terms of trade”.

BAML

While BAML doesn’t expect the RBA to begin normalising policy settings until after Australia’s next federal election, with short speculative positioning in the Aussie elevated compared to historic norms and financial conditions easing on the back of the lower currency, any sooner-than-expected change in bias from the RBA, signalling the cash rate could increase, would likely lead to a “strong reaction” in both the Aussie dollar and Australian interest rate markets.

As such, BAML is forecasting the AUD/USD will climb to 75 cents by the end of this year before extending that rally to 84 cents by the end of 2019.

It currently trades at .7230.

Investing.comAUD/USD Daily Chart

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