AUD: Vulnerabilities to Remain – ANZ
Research Team at ANZ, suggests that impending risks are not fully priced into the AUD and they continue to forecast a lower AUD by year end.
“The AUD has sold-off sharply over the last month. The initial catalyst for the decline was domestic interest rates following the disappointing Q1 CPI data and May RBA rate cut. Since then, other factors have exacerbated the trend.
The iron ore price has likely peaked for now, while market pricing of the probability of a Fed hike has increased. We think the risk is that these trends extend. In particular we are concerned that interest rates between Australia and the US will continue to narrow.
Further out, any increase in market pricing of rate cuts from the RBA is likely to have an outsized (and negative) impact on the AUD in an environment where more central banks are ‘on hold’ rather than easing.
Our model suggests the AUD is still trading above fair value despite the sharp reversal in May. With risks skewed to the downside, we remain comfortable with our target of USD67 by end 2016.”