1. Australia dollar seen soft, New Zealand dollar forecast less bearish

Australia dollar seen soft, New Zealand dollar forecast less bearish

Analysts have become slightly more bearish on the outlook for the Australian dollar after the currency hit a three-week low, but upgraded their forecasts for the New Zealand dollar partly in anticipation of higher dairy prices.

By: | Published: June 2, 2017 12:15 PM
The Aussie slipped to ##IMG-CONTENT##.7372 this week as a weak private survey on China’s manufacturing activity, combined with unimpressive data at home disappointed Aussie bulls.

Analysts have become slightly more bearish on the outlook for the Australian dollar after the currency hit a three-week low, but upgraded their forecasts for the New Zealand dollar partly in anticipation of higher dairy prices. A Reuters poll of 56 analysts saw the Aussie stuck at $0.7400 from now until May 2018. That was slightly down from the April survey, which put the currency at $0.7450 in one year.

The Aussie slipped to $0.7372 this week as a weak private survey on China’s manufacturing activity, combined with unimpressive data at home disappointed Aussie bulls. At 0300 GMT on Friday, it was trading at $0.7383. Also weighing on the Aussie is falling prices of iron ore, Australia’s top export earner.

Still, the local dollar is up 2.5 percent so far this year, having found support from attractive government bond yields even as the spread between Australian and U.S. 2-year government bonds shrunk to 27 basis points, the smallest in 16 years. For some analysts, the Aussie’s blip lower is seen as temporary.

“The AUD/USD has scope to edge modestly higher partly because commodity prices will remain on an upward trend over 2017,” said Elias Haddad, a strategist at Commonwealth Bank of Australia who sees the global economy in its first synchronised upswing in years.

“This will lead to a trend improvement in Australia’s terms of trade,” he said, forecasting the Aussie to rise to 76 cents by the end of 2017 and 78 cents by mid-2018. Haddad also expects the Aussie to gain support from higher interest rates, albeit not for some time.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on June 6 and is seen certain to keep rates at a record low 1.5 percent. A majority of economists polled by Reuters forecast steady rates until mid-next year, with an increasing number predicting that the next RBA move will be up, rather than down.

Debt futures imply an around one-in-five chance of a cut this year. Across the Tasman Sea, analysts were less bearish on the New Zealand dollar compared with its Australian counterpart, having upgraded their forecast.

The kiwi was seen to weaken to $0.6900 in 12 months, up from $0.6850 in the April poll. It popped above 71 cents this week for the first time in three months, and at 0314 GMT on Friday was trading at $0.7067. On a one-month horizon, the kiwi was seen at $0.6922 before slowly declining to $0.6900 in three months and $0.6810 in six months.

The currency rallied 3 percent in May, largely due to solid economic data at home and a brighter outlook for dairy prices, New Zealand’s top export earner. Also helping capping the kiwi’s downside is its relative yield appeal compared with the negative returns of Japan, Germany and Italy.

The Reserve Bank of New Zealand held interest rates at a record low 1.75 percent last month largely because of subdued inflation. The central bank said earlier this year it had no intention to raise rates for perhaps another two years. Nonetheless, debt futures are pricing in a 50-50 chance of a tightening by March next year and are fully priced for a June hike.

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