Here's Why The CBA's Head Of Forex Strategy Says The Aussie Dollar's Fall Is Not Over Yet

Getty/ Kevin Winter

The Aussie dollar has fallen heavily recently from a high of 0.8907 just seven sessions ago to a low yesterday of 0.8550.

It’s a fall that the CBA say will continue with Richard Grace, CBA’s head of currency strategy, writing in a note to clients that the Aussie dollar will not “remain immune” to the move toward a stronger US dollar.

AUD/USD cannot remain immune to the presence of a very strong and persistent global bid for USDs. Furthermore, the demand and currency adjustment in favour of the USD vis-à-vis the JPY and EUR appears set to remain in place for at least twelve months; and more likely a number of years. Consequently, with upward pressure on the USD, then AUD/USD must move lower, even if AUD continues to hold up relatively well on a trade-weighted basis.

As well as the US dollar’s strength as a downward force on the Aussie, Grace cites other factors also working against the Aussie dollar, including:

Lower global commodity prices
“Downward revisions to global growth and large-scale increased global commodity supply are applying downward pressure to iron ore and energy prices,” Grace says and after a fall of 24% from the peak Australia’s terms of trade is about to “record another fall in the current quarter.”

This, Grace says “remains one of the most reliable long-run guides for the AUD, and it is suggesting a lower AUD.”

Australia-US yields spreads moving lower
Grace says that “Australia’s two-year bond yield has again moved below the RBA’s cash rate. At any point in the interest rate cycle, this event typically puts downward pressure on the AUD.”

He adds that while the current spread narrowing is not “technically a fresh cyclical low”, there are two reasons the pressure remains on the Aussie.

(1) The RBA’s cash rate in June 2012 was 100 bpts higher at 3.50% than it is today; and (2) Australia’s terms of trade was 20% higher in June 2012 than it is today. On both of these measures, AUD should be lower today.

The Fed Is Going To Raise Rates

Grace says that there is a risk for the Aussie dollar in the RBA’s “period of stability”.

“After all, this monetary policy guidance from the RBA and the current market pricing for RBA interest rates corresponds well with the timetable of the mining investment downturn completing the remaining two‑thirds of the downturn, and the RBA’s forecast of the Australian unemployment rate peaking in early 2016,” Grace says.

In this environment, the Fed’s move to increase interest rates and the natural impact that should have on US dollar demand is a downward force on the Aussie.

If the Fed lifts interest rates in June 2015, as we anticipate, then downward pressure on the Australia‑US two‑year bond spread will be maintained and brought forward in a rather aggressive manner. This narrowing in Australia‑US interest rate spreads will continue to apply downward pressure on AUD/USD.

It all means that the Aussie dollar’s fall isn’t over yet. And while Grace is mega-bearish, in a Morgan Stanley 76 cent way, he does say the fact the “AUD typically undertakes a 20.5% annual trading range (it has averaged this every year since the currency floated in December 1983)” means that the “we will see low 0.8000’s trade, sooner than forecast.

“We suggest maintaining a strategy of selling into rallies on the AUD/USD.”

That’s about as bearish as an Aussie major bank gets.

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