Friday, November 20, 2015

AUDUSD to flirt with 0.67 levels in 2016 – Nomura

FXStreet (Delhi) – Charles St-Arnaud, Research Analyst at Nomura, suggests that AUD is expected to depreciate over the coming year and AUD/USD should reach 0.67 by year-end 2016.

Key Quotes

“After depreciating by more than 15% on a trade-weighted basis between September 2014 and September 2015, AUD has been relatively stable in recent months. A stabilisation in commodity prices, until recently, may explain the resilience as well as the Federal Reserve’s delay of the timing for rates lift-off.”

“Based on the current level of commodity prices, we estimate that fair value for AUD/USD is around 0.70, meaning that the cross is not significantly overvalued. On a real effective basis, we find a similar result that AUD is overvalued by only about 2.5%. This likely explains the lack of concern expressed by the RBA at its recent policy meeting. This also means that further declines in commodity prices or a narrowing of the rates differential will be needed to push AUD significantly lower.”

“We currently expect the RBA to cut rates at its February meeting, but we note that, given the resilience of the domestic economy, especially the labour market, it is not a certainty. Financial markets are currently pricing in about a 30% probability of a rate cut in February.”

“On the flow side, our analysis of Japanese investor flows suggests that they have sold AUD assets in recent months. This is consistent with our analysis of the Australian balance of payments, which suggest that portfolio flows into Australia slowed in 2Q and this was likely also the case in 3Q (the balance of payments for 3Q will be released on 1 December).”

“We expect continued pressure on industrial commodity prices, especially iron ore, as supply continues to increase due to the start of production at some projects in Brazil and Australia, while demand is expected to remain subdued because of the rotation away from industrial activity to services in China. Moreover, the narrowing of the rates spreads vs the US, as the RBA is expected to cut rate in February and the Fed starts the normalisation process, should also push AUD/USD lower.”
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