AUD: Flows, Valuation, Risks, Forecasts – Danske

The Australian dollar was on the back foot lately, driven lower by various factor.

The team at  Danske analyze the various forces moving the Aussie and sets out forecasts for the next periods:

Here is their view, courtesy of eFXnews:

Flows. According to CFTC IMM data, speculative AUD accounts are stretched short .

Valuation. Fundamentally, the AUD remains overvalued with a Danske Bank PPP model estimate for AUD/USD of c.0.74. Our FX Short-term financial model also suggest that the pair is currently overvalued with a fair value estimate of 0.824

Risks. Short term, a strong carry performance versus the JPY, in particular, and portfolio flows into Australia from Japanese funds might provide some temporary resistance to AUD weakness. The AUD remains exposed to global risk sentiment.

Forecast: 0.82 (1M), 0.81 (3M), 0.80 (6M) and 0.79 (12M).

Conclusion. During much of the autumn, markets were pricing in interest rate hikes by the RBA in 2015. Meanwhile, we argued that the risk was considerable of the mining investment drop turning out to have more severe effects on the economy than expected, and that risks were therefore instead skewed to the downside. In the past month, data releases have indeed surprised to the downside and the market has now shifted to pricing in a 55% chance of a rate cut in Q1 next year. We believe the change in pricing is justified and for five main reasons we now believe that the RBA will make a single rate cut in Q1 15 (see next slide for more details). Specifically, we expect the RBA to cut in March and for governor Stevens to communicate an explicit easing bias at the next meeting in February. In addition, we still expect US growth outperformance, relative monetary policy and the USD’s role as an asset currency to pull AUD/USD lower.

In light of the above we revise our targets and now expect AUD/USD at 0.82 (prior 0.86) in 1M, 0.81 (0.85) in 3M, 0.80 (0.84) in 6M and 0.79 (0.83) in 12M.

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