In what is becoming an increasingly contrarian view, Australia’s St George bank has NOT lowered its forecast for the year-end level for the Australian dollar, remaining of the view that the Aussie will end the year higher, not lower, than its current level of .7157.
According to Janu Chan, senior economist at St George, a combination of excessive pessimism towards the outlook for the Chinese economy, along with the view that the RBA’s easing cycle is now complete – something that the markets currently disagree with – are likely to act in unison to push the Aussie higher over the near-term.
“In our view, markets have taken an overly pessimistic view on the outlook for China, the domestic economy and interest rates. Our expectations of the broader outlook for the Australian economy are not materially different from a few months ago. We continue to expect the RBA will leave rates on hold until late 2016.
We therefore see a risk that the Australian dollar will partly rebound. We are maintaining our end of year forecast at 0.73 US cents, but we recognise that downside risks exist for our forecast while sentiment remains fragile. Volatility has escalated and there remains more uncertainty than usual surrounding our forecast”.
While not a huge movement in the scheme of things, the AUD/USD currently sits at .7157, just 2% below St George’s year-end target, the differentiation behind this call compared to others is that it has not been lowered in line with the recent increase in financial market volatility.
Although a seemingly bullish AUD call compared to others, St George does not expect the rally into year-end to be sustained in 2016.
“It will likely come under downward pressure over the course of 2016, as the tightening cycle of the Federal Reserve takes hold and we expect the AUD to track close to 70 US cents throughout early next year,” says Chan.
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