AUD to Appreciate to 0.78 by Year End; NZD to Weaken to 0.62, According to Lloyds

AUD to Appreciate to 0.78 by Year End; NZD to Weaken to 0.62, According to Lloyds

9 March 2016, 12:02
Vasilii Apostolidi
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Analysts at Lloyds Bank provide their insight and forecasts for the Australian and New Zealand Dollar.

Analysts at Lloyds Bank forecast the Australian dollar to gradually appreciate towards 0.78 by the end of the year – as long as global risk appetite remains stable.

They cite increased optimism about growth in the domestic economy, a more hawkish central bank and stabilising risk sentiment as major contributing factors to the rise.

They single out as key the Australian economy’s ability to shift from a resource-driven, heavy industry model to a more service-orientated economy.

“Australia is seemingly reaping the benefits of diversification away from commodity-based industry towards the services sector, as GDP growth for Q4 2015 rose to 3% and the trade deficit narrowed from A$3,535m to A$2,937m.”

The Reserve Bank of Australia has kept interest rates at 2.0% for several months now and appears to be shifting out of its easing cycle after positive Q4 GDP data supported the outlook.

Risk sentiment has stabilized on a rebound in commodity prices and less volatile movements in the Chinese currency, as well as increased confidence in the Chinese economy.

Also aiding the Aussie’s recovery - in the AUD/USD pair at least - is the change in outlook for Federal Reserve monetary policy, with the next rate rise now not expected until 2017.

The note says that according to Reserve Bank of Australia’s Governor Stevens, “the key risk to Australia remains “the outlook for China’s growth.”

An active Peoples Bank of China (Pboc) appears to have reassured markets about how they are handling the slow-down in China, as well as recent upbeat commentary from its leaders, although how valid such rhetoric is remains questionable.

Rising Commodities

The price of Iron Ore has bumped higher as a result of Pboc stimulus expectations, rising by roughly 20% in a single day on Monday.

Australia is the second largest Iron Ore producer in the world and the commodity is its single most important export.

In a note about the recent appreciation in Iron Ore, West Pac Bank argued not all the increase in value of Iron Ore has been baked into the price of the Aussie yet, predicting the currency still had further to appreciate to price in all the rise:

“Higher iron ore prices will boost AUD via our long run terms of trade valuation signal, a stronger yield signal and through sentiment channels in our growth signal. The net impact based on our model signals lift AUD's equilibrium by around 2-3%, at least.”

Analysts at Goldman Sachs and ANZ however are more cautious about the recent rally in commodities which they don't necessarily expect to last.

New Zealand Dollar to weaken

In the same note as that in which they discussed the Aussie, analysts at Lloyds also discussed the outlook for the New Zealand Dollar too.

They foresee the currency weakening from its current level and falling in the short-term down to its range lows at 0.62 before, “before staging a recovery and consolidating around recent range highs.”

They cite continued week milk prices and the Reserve Bank of New Zealand (RBNZ) as major factors influencing the weakness. 
RBNZ Governor Wheeler has repeatedly voiced concerns about the overheating housing market and the currency which he has said is, “too strong.”

It’s quite possible that Wheeler and the rest of the board will reduce base lending rates from their current 2.5% level lower in order to alleviate these problems.

It would also reduce the amount of speculative buying of the currency from international carry traders taking advantage of the relatively high interest rate.

Carry Traders use currencies with low interest rates such as the euro to buy currencies with higher interest rates, such as the New Zealand dollar, so that they can park their money in New Zealand bank or broker where it will earn superior interest from that which it would earn in its country of origin.

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