CHARTS: Here's Why NAB Thinks The Australian Dollar Will Head Towards $US0.83

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NAB is expecting the Australian dollar to be worth $US0.93 by the end of this year and $US0.83 by the end of 2015, after falling from parity in mid-May.

According to NAB’s global co-head of FX strategy Ray Attrill:

    • The significance of the shift in market expectations about when the US Federal Reserve might begin to dial down its Quantitative Easing Policy cannot be overestimated.
      Nor too should the sharp rise in currency market volatility which has killed the attractions of the AUD carry trade.
      The AUD short term ‘fair value’ has fallen significantly as effective US interest rates have become less negative anticipating the ‘tapering’ of Fed quantitative easing.
      At a point where the Fed can exit from its unconventional policy settings, fair value for the AUD drops to near $US0.80 – but this should not happen quickly.
      Technically, the $US0.94 area is very important; failure to convincingly break below here offers hope for consolidation of recent losses.
      Speculative traders are already short AUD in record amount.
  • The effect of US bond yields

    As of May, Australia’s government bond yields were offering the smallest premium over their US counterparts in 11 months.

    FX volatility is up

    Investors have been negative about the AUD with China slowing and commodity prices falling. Volatility has doubled since May 1. Last month, Goldman Sachs analysts forecast the AUD to be worth $US0.90 in 12 months. CommBank's 12-month forecast was $US1.03.

    Currency carry trade is less attractive

    The AUD has traditionally been attractive for carry trade, for which investors borrow money where interest rates are low - such as the US - and lend where interest rates are high. AUD-USD currency carry trade has become less attractive because of the risk associated with the volatile exchange rate.

    The effective US interest rate isn't zero - it's negative

    With Reserve Bank of New Zealand researcher Dr Leo Krippner, NAB has pegged the effective US interest rate at -6.5% at the end of April and -4.5% in May by accounting for the Fed's unconventional policy measures. The AUD's value will fall as the effective US interest rate returns to zero, NAB predicts.

    AUD technical view

    NAB reckons the dollar will be worth more than $US0.94 until September, and $US0.93 by December.

    All short sellers seem to have sold

    Short selling of the AUD has hit a record level, so NAB reckons the dollar should be in for a recovery since 'everyone seems to have already sold it'.

    NAB's FX strategy targets

    NAB is expecting AUD/USD to fall from 0.95 this month to 0.94 in September, 0.93 in December, 0.87 next December and 0.83 in December 2015.

    The AUD slid to around $US0.952 at noon today, after the Reserve Bank of Australia released minutes of its monthly meeting.

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