AUD/USD Monthly Fundamental Forecast April 2012

Outlook and Recommendation

The Australian dollar (AUD) will remain well supported over the forecast horizon. Firm external and improving fiscal account fundamentals, strong ties to Asia and exposure to highly bid commodities all work in favor of the AUD.

Concerns over the economic outlook in Australia and China, combined with worries that the RBA is shifting to a more dovish stance weighed materially on AUD in March. However, investors maintained their long position, with the CFTC reporting a net long of US$6.2 billion. Medium-term technical’s have remained in bullish territory. We expect AUD to shine in 2012 and hold a 1.07 Q212 target. 

Last month the AUD/USD traded in the range shown below:

Highest: 1.0817

Lowest: 1.0305

Difference: 0.0512

Average: 1.0540

Change %: -3.6496

 

The Australian dollar has been in correction mode (against the USD) since the beginning of the year after testing a yearly high level of 1.0856 at the end of February. Nevertheless, we do believe that a positive combination of relatively strong growth fundamentals and attractive interest rate differentials (10-year government bond yields trading at 4.1%) will re-inject an appreciating bias into the AUD in the months to come. AUDUSD is set to approach the 1.10 mark. Strongly influenced by trade with the Asian giants as well as by supporting commodity prices, the Australian economy is well positioned to post annual average growth rates of 3-3.5% over the next two years. Flow of funds will also remain supportive as Australian bond yields remain the highest within the universe of (only 11) AAA rated sovereign credits. It is worth noting that, for now, global market participants remain indifferent to a persistent twin (fiscal and current account) deficit position, a negative factor that may instill higher volatility in the medium term.

The Reserve Bank of Australia will likely leave the benchmark cash rate unchanged for now. While the latest indicators of labor market stress have been on the low side, with lower wage pressures likely prevailing during the current quarter.

Whereas, the US the dominant factor driving the North American currency forecast is the outlook for the US economy (and employment) in addition to oil prices, central bank policy and shifts at the long end of the US Treasury yield curve. The US dollar (USD) is supported by an improving economic backdrop, flows into US securities markets and a weakening outlook for both the yen and euro; however, US central bank policy and elevated oil prices are significant weights against the USD.

 

Central Bank

Central Bank:  Reserve Bank of Australia

RBA INTEREST RATE DECISION

Actual: 4.25%  Cons.: 4.25%  Previous:  4.25%

RBA Interest Rate Decision is announced by the Reserve Bank of Australia. If the RBA is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the AUD. Likewise, if the RBA has a dovish view on the Australian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.

FED INTEREST RATE DECISION

Previous:  0.25%

The Board of Governors of the Federal Reserve announces an interest rate. This interest rate affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the exchange rate. Generally speaking, if the Fed is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the USD.

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