Australian Dollar's Arduous Climb Higher to Extend, According to J.P Morgan's Auld
16 March 2016, 20:17
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Analysts at J P Morgan see the AUD/USD trough lows holding, and the tentative up-trend advancing, although upside progress will probably be slow.
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J P Morgan’s Sally M Auld has stuck to her bullish forecast for the Australian Dollar, although she has down-graded the pace of the rise, expecting a slower recovery to 0.77 by the end of the year.
A combination of a benign outlook for China, a floor in Iron Ore – Australia’s chief resource – and the significant rate advantage Australia has over the rest of the G10 bar New Zealand, provide the three pillars of the bullish outlook.
They further argue that AUD is currently near ‘fair value’ based on RBA models, and therefore there is little scope of adjustment lower in the medium term.
As far as downside risks go, Auld sees the two main ones for the Aussie as China landing harder-than-expected and the Fed upping the pace of rate hikes as the top two spoilers.
However, overall she does not see China as a major risk, arguing:
“Given the risk of stabilisation in Chinese growth outcomes in 1H16 (given modest monetary easing and scope for small fiscal stimulus), we are minded to downplay the bearish China influence on our AUD forecasts in 1H16.
The FOMC meeting on Wednesday 16 will be a major influencer in regard to the latter risk, as it will show revised members expectations of when they expect a rate hike, in the Fed's dot-plot diagram.
Analysts at Standard Chartered bank also see less risk emanating from China, as the authorities seek to stabilize the economy:
“We expect China to tighten capital controls in the coming months and keep its currency largely stable against those of its major trading partners.”
They also see little risk of the Fed renewing their more hawkish rate hike agenda, expecting them to hold rates in March and only raise once on 2016.
The Opposite View
As far as the Australian Dollar, goes, however, they take the opposite view, arguing, “we prefer to remain bearish until a clear bottoming of commodity prices is evident.”
The add that a further that continued exposure to China devaluation risks is a further risk which requires caution.
The note the RBA has not ruled out further rate cuts.
On the upside, however, they see domestic economic conditions improving and BOJ easing expanding the market in Japan.
This chimes with U.S Investment Bank Morgan Stanley’s perspective, which argues commodity prices are likely to remain lows as, “capacity overhangs adjust.”
Withdrawal of investment in the commodity industry should further keep commodity FX valuations low.
The note ends:
“Our favorite picks in the commodity space are to be short AUD and CAD.”
Neither of these views addresses the trend for commodity producers to self-cut production as a tactic to push prices higher, which has been a major factor in the rise in iron ore – Australia’s principle commodity.
Technical Perspective
Turning now to a technical analysis of AUD/USD and J P Morgan remain mildly bullish, with the proviso the exchange rate may meet significant, successive set-backs on its journey up to 0.77.
“The short term backdrop for AUD has improved with the recent outperformance and renewed trending bias against the USD and for the crosses. Still, the potential for a pause/retracement to the rally has increased given the approach of the next line of critical resistance levels.”
Pound Sterling Live’s own technical analysis supports the bullish view, adding that the pair has formed a bullish double-bottom pattern at the lows, the neckline of which has been broken, and the next active minimum target is therefore at 0.7739 - although the R3 monthly pivot at 0.7693 provides an interim target should the market move quickly.
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