'Paradigm shift': ANZ remains bearish on the Australian dollar as global markets brace for change

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The Australian dollar looks fully valued, but near-term market drivers should allow it to stay at or near its current level for now.

That’s the view of ANZ strategists in their latest currency outlook, also noting that the AUD has stalled after it climbed by more than 7% off its May lows.

It’s been range-bound since a surge in July, when currency markets drove the US dollar lower in the wake of more political turmoil in Washington.

Combined with minutes from a meeting of the Reserve Bank of Australia that the market interpreted as more hawkish, the AUD suddenly moved swiftly towards US80 cents.

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But according to ANZ, the US dollar looks oversold. Indeed, the US dollar index touched its lowest level in more than two and a half years on Monday. The greenback has since bounced off its lows this week, helped by some solid data prints.

While there may be room for more US dollar upside at current levels, ANZ economist Giulia Lavinia Specchia said the AUD is also supported in its own right by a reasonable fundamentals picture.

“The recent improvement in the growth environment, along with ongoing strength in the labour market and some stabilisation in wage growth mean that the balance of risks for the RBA has turned less dovish,” she said.

So while ANZ expects Australian interest rates to stay on hold “for the forseeable future”, the market pricing for future interest rates moves is now skewed slightly to the upside.

Then there’s rising commodity prices and the market’s positive sentiment towards China.

While those factors have obviously provided support for the Aussie’s recent strength, Specchia said their positive impact has already been priced in with the AUD at its current levels.

For now, global markets are tracking steadily, with a combination of stable growth and low inflation.

But according to ANZ, foreign exchange markets are “approaching a paradigm shift”.

The bank’s G3 volatility index shows a mild uptick in volatility across global markets, moving off a recent trough:

The impact of these shifts will be difficult to assess over the next month or so.

In that time frame, “markets are caught between extended momentum, and absent catalysts”, the bank said.

Longer term though, ANZ is sticking to its bearish forecast for the Aussie dollar.

“Domestically, a number of uncertainties remain, especially, as the outlook for the household sector remains clouded, with the combination of high household debt and low wage growth likely to weigh on consumers spending and dent confidence,” Specchia said.

The bank maintains the view that global liquidity has peaked after years of central bank stimulus.

The withdrawal of that liquidity, which will partly impact the pickup in global volatility, will also reduce demand for riskier currencies such as the Australian dollar.

“With market volatility set to rise, cyclical currencies are likely to underperform. As such, we maintain a mild downward bias for the AUD,” Specchia said.

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