WESTPAC: The time to sell the Australian dollar is nigh

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While the Australian dollar is on an epic run of late, rising for nine consecutive sessions, the longest stretch of gains since the depths of the global financial crisis, many are now asking whether the run higher can last.

It’s rallied by more than 6% in just 10 trading sessions, enough to make even the most seasoned of traders question whether now is the time to get short.

However, like his chief economist Bill Evans, Westpac’s head of macro strategy Robert Rennie doesn’t expect the rally to last, predicting that it is on its last legs and will likely reverse in the months ahead, and then some.

Rennie suggests that the steep move higher in the Aussie was partially due to “aggressive short covering from higher frequency traders” on the back of reduced expectations for higher US interest rates this year, resilience in Chinese stocks since coming back from the Golden Week holiday and improved investor sentiment.

The chart below reveals the decline in short Aussie dollar positioning from leveraged investors and asset managers in recent weeks, something that has corresponded with the sharp rally in the currency.

While he acknowledges that rally could continue over the short term, Rennie expects the Aussie’s decline will resume over the medium-to-longer term.

Here’s his synopsis.

“In the short term, I can see AUD up to 0.7380 (38.2% retracement of the May high to August low), possibly 0.7410/20 (the top of the downtrend from the September high last year and May high this year). But beyond that, I remain confident in Bill’s view i.e. that markets are complacent on the Fed; that the outlook for iron ore prices will deteriorate as additional supply comes onstream in coming weeks; and that the chronic trade deficit will all help to undermine the AUD into the end of the year. So as we approach 0.7380/ 0.7420 I will be increasingly arguing to hedge or to sell AUD at levels that we would be most surprised to see persist into 2016.”

Westpac believes the AUD/USD will finish the year buying 68 US cents, before extending that decline to 66 US cents by the end of the March quarter of 2016.

In Rennie’s view, risks to his call lie with the domestic and Chinese economic data calendar in the days ahead.

“For the AUD to continue to push higher, we would have to see good domestic news – with NAB business sentiment tomorrow, Westpac consumer sentiment Wednesday and employment on Thursday. We will also have to see some good China news with trade data tomorrow and CPI Wednesday. Much more important will be Q3 GDP and IP next Monday,” he wrote.

Despite the release of the NAB’s Australian business survey for September earlier today, something that revealed a strong bounce in confidence and business conditions remaining at elevated levels, the AUD/USD has fallen in Asian trade. As of 12.30pm AEDT it currently trades at .7327, a decline of 0.42%.

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