Australian Dollar’s Rally Faces One Big Risk Suggest CitiFX

Citibank, the world’s largest currency dealer, believes the major threat to extensive Aussie dollar appreciation is the Reserve Bank of Australia.

The Australian currency is moving higher at break-neck speed on a combination of a benign outlook for China, a floor in iron ore’s declines, and the significant rate advantage Australia has over the rest of the G10 bar New Zealand.

Should these trends continue improving, as widely expected, it would appear the only credible obstacle to the currency’s run higher is Reserve Bank of Australia intervention.

This week’s Australian jobs report is unlikely to sway the RBA either way on monetary policy and this leaves the recent bounce in commodities as encouraging further AUD buying in the short term in the FOMC-induced risk-positive environment.

However, “while the RBA is unlikely to follow in the RBNZ's footsteps on cutting rates, that will not stop it from leaning against AUD appreciation more verbally, if needed,” say CitiFX in a brief to clients.

We note 2 RBA officials have already come out in the past few days highlighting increased concerns about AUD appreciation.

We would argue mere words are unlikely to halt the Australian dollar as proven in the past. A case in point is the attempt by the RBA’s Christopher Kent in November 2014 in which the AUD fell on his jawboning only to soon recover, and advance further.

Unless central banks back words with action there is little prospect of verbal intervention working.

Nevertheless, in light of the Australian dollar trading to 8 month highs against the US dollar we should be unsurprised if RBA Governor Stevens highlight the impact of the move higher on inflation expectations and monetary conditions.

Stevens next speaks at the ASIC forum on March 22.

“While the central bank are mindful of the difficulties of attaining a cheaper currency, without explicit policy action, expect Stevens to attempt to talk the currency back lower,” says Jeremy Stretch at CIBC in London.

GBP to AUD Exchange Rate Outlook

Pound sterling is meanwhile seen trading at its lowest levels since March 2015 and all indicators point to further losses.

The GBP/AUD is trading below the short- medium- and long-term moving averages confirming the outlook is negative in all timeframes.

In the current market we would suggest it is futile calling a downside target as there is little written into the charts that gives us clues as to where selling may dry.

AUD to USD Exchange Rate: Targeting 0.7597

CitiFX Technicals have gone long AUDUSD at 0.7597 to target 0.8120-.8180 as they see a technical breakout in the pair as well as in oil and other commodities.

The CitiFX Flows team also point to real money buying of AUD recently but none of this is likely to stand up to heightened verbal intervention from the RBA, if and when it comes.

Indeed, “the risks for such a move are gathering pace and AUDUSD sees no major support until 0.7400/0.7385 and 0.7246,” say Citibank.

The better way to play for AUD resilience, argue Citibank may lie on crosses against EUR & GBP and with AUDNZD targeting 1.1300 – 1.1350.

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