The Aussie dollar has defied all bearish predictions and the Reserve Bank’s months-long view that it should be lower. Recent retail sales and Q4 GDP, along with yesterday’s strong employment data, have lifted it back above 90 cents this afternoon.
That’s unusual for a currency that would normally be the first asset sold when commodities like copper and iron ore tank, when geo-political tension rises, and when fears over the Chinese economy are rising as they have this week.
But it’s a situation that Goldman Sachs does not expect to last, as they have downgraded their forecasts for the Aussie dollar by at least five cents on a 3, 6 and 12 month basis to “to 0.85, 0.82 and 0.80, from 0.90, 0.88 and 0.85.”
Goldman Sachs Australia chief economist Tim Toohey says that despite the recent run of strong data, “the guts of the data releases are not as positive as the headlines suggest.”
With the weakness under the hood and the ongoing influence of the turn in the investment cycle, we still think that there is a good chance of an RBA cut over the summer.
This would provide a catalyst for further AUD weakness as the Australian-US rate differential resumes it narrowing trend. It is worth noting that AUD/$ has followed the 2-year interest rate differential more closely in recent months.
Risks associated with Chinese tightening and economic growth haven’t resonated with Aussie dollar traders yet, but Toohey is far less sanguine than the market, noting: “Geopolitical risks and ongoing concerns over the impact of tightening Chinese financial conditions together risk a more immediate downward adjustment in the A$.”
For now the Aussie dollar is still defying forecasters like the RBA and Goldman Sachs.
Disclaimer: Greg McKenna is an active currency trader who agrees with the RBA and Tim Toohey and is short – even though the market has been saying something different for a while now.
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