Australian Dollar: NAB, HSBC Forecasting Further Gains as RoRo is Back in Control

The near-term outlook favours more Aussie dollar strength, but both institutions are forecasting weakness towards the end of 2016.

• Australian dollar softer at start of the week, weakness likely to be temporary
• GBP/AUD = 1.9040, AUD/USD = 0.7538, EUR/AUD = 1.4748
• "As RORO becomes more important, attempting to forecast AUD and NZD on their own fundamentals becomes a fool’s errand." - HSBC.

Within the space of a month fortunes have swung decidedly in favour of the two trans-Tasman currencies.

In the first six weeks of 2016, the big market stories were low commodity prices and a ‘slowing’ China.

This left the AUD and NZD as the two worst performing currencies in G10 and analysts were confident that more losses lay ahead as the theme of falling commodity prices continued.

Here we are in March and the AUD has hit its best level vs the USD since August 2015, at 0.74.

The Aussie is at its best level against the pound since April 2015.

“The driving factor behind these moves appears to have been changes in general risk sentiment, rather than anything specific to the AUD or NZD,” note HSBC in a currency outlook briefing to their customers.

Yes it’s now a little different for the NZ dollar which has been hit by a surprise interest rate cut, but it is too early to ascertain whether or not the impact of this domestic driver will be lasting.

Why has the Australian Dollar Risen Recently?

This is an important question, understandably, as it gives us clues as to whether further strength will be forthcoming.

While the Australian economy continues to pump out decent data releases, the strength in AUD of late can not be attributed to data alone it is argued.

“The key driver has not been shifts in interest rate differentials, albeit Australian rates have moved slightly in the AUD’s favoursince the Q4 GDP outcome reported at the end of February,” say NAB in a FX briefing, “rather, it has been the improvement in global risk sentiment and as proxied by the fall in volatility.”

Analysts at HSBC agree saying the risk on – risk off (RORO) paradigm is starting to strengthen again, and the AUD has responded accordingly.

“When RORO is dominant assets lose much of their individual characteristics and their fate is determined by general risk moves,” note HSBC.

So when stock markets and commodity prices are rising we can confidently bet the Australian dollar will be following.

It is important to note that this is ‘more true’ at given periods of time and what is important to note is that we are at a period of time in which RORO is influential.  

“In a RORO world, assets behave either as safe havens, or as risk assets and their own fundamentals become subordinated to the overall risk environment,” say HSBC, “this means that as RORO becomes more important, attempting to forecast AUD and NZD on their own fundamentals becomes a fool’s errand.”

So, if risk sentiment matters for the Aussie, where do analysts see regarding the outlook for general risk sentiment?

Oil Matters for Risk, and Thus AUD

Whilst there are many factors which can determine the market’s appetite for risk, HSBC argue developments in the price of oil are likely to be of critical importance.

Analysis conducted by the bank suggest that has resulted in a ‘core view’ that the price will remain broadly stable this year, in line with the futures, which should support the AUD and NZD.

Forecasting More Gains Ahead of a Soft End to the Year

HSBC do however forecast the AUD to weakening slightly and they hold a AUD/USD target at 0.70 by the end of 2016.

Analysts see NZD-USD moving sideways, flat at 0.68 throughout the year.

NAB adopt a similar scenario:

“We remain of the view that a combination of higher US rates over the balance of 2016 than currently priced and a failure of the 2016 year-to-date commodity price rally to persist, will bring AUD/USD back down later this year.”

The move will probably be aided by a failure of global risk sentiment to sustain the improvement seen in recent weeks argue NAB.

“Our Q4 2016 forecast stays at 0.67. Yet in the immediate future, it is going to take some sort of shock if the 0.7830/80 levels are not going to be approached or tested,” say NAB.

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