Photographer: Carla Gottgens/Bloomberg

Commonwealth Bank Turns Bullish on the Aussie

  • Rally `might be capped' by RBA, says top forecaster UniCredit
  • UniCredit 73 cents forecast contrasts with 78 at Commonwealth

Australia’s largest bank turned bullish on the local dollar after the currency beat all its major peers last month. The top forecaster says the rally will be snuffed out.

Commonwealth Bank of Australia predicts the Aussie will climb to 78 U.S. cents, from 76.05 cents on Thursday, as the economy improves and U.S. interest rates stay close to zero. UniCredit SpA, Italy’s largest bank, sees a retreat to 73 cents this quarter because the central bank will seek to stop a stronger currency hampering the recovery.

“The risk is that this rally might be capped by the Reserve Bank of Australia,” said Roberto Mialich, a senior foreign-exchange strategist at UniCredit in Milan. “The downside potential should meanwhile remain quite limited unless there’s a sharp deterioration in the global growth and risk picture.”

RBA Governor Glenn Stevens said a rebounding Aussie may “complicate” an economic adjustment that’s under way, after leaving interest rates at a record-low 2 percent on Tuesday. Currency traders became the least bearish this week on the Aussie in eight months, options pricing shows, and hedge funds betting on the currency’s gains have outnumbered those expecting declines since the middle of February.

Recovery Process

“The Aussie has room to strengthen without reaching fundamental extremes because Australia’s terms of trade is in a recovering process,” said Elias Haddad, a currency strategist at Commonwealth Bank in Sydney. “Monetary conditions in Australia are still very accommodative despite the recent up-leg in the Aussie.”

A Citigroup Index that maps Australia’s terms of trade has risen for two straight months as the price of the iron ore, the country’s largest export, climbed more than 40 percent from a low in December. The terms of trade refers to the price of exports relative to imports.

Commonwealth Bank raised its year-end forecast of the Aussie to 78 cents last week, from an earlier estimate of 70 cents, predicting the currency’s first annual gain after three years of losses. UniCredit expects the Aussie to trade mainly between 73 and 75 cents for the remainder of the year, Mialich said.

The Aussie surged 7.2 percent against the greenback last month as commodity prices rallied and traders pushed back forecasts for when the U.S. Federal Reserve will raise interest rates. The currency advanced to a nine-month high of 77.23 cents on March 31, from a seven-year low of 68.27 cents in January.

Premium Shrinks

The premium that traders pay for contracts giving the right to sell the Australian dollar for three months, compared with those to buy, shrank to 1.3 percentage points on Monday from as much as 2.24 percentage points in January, according to data compiled by Bloomberg.

The Aussie’s strength is set to evaporate, according to the rest of the nation’s largest banks. Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd., Westpac Banking Corp. and Macquarie Bank Ltd. all see the currency ending the year below 70 cents, even as they reined in their bearish forecasts last month.

“This Australian dollar upswing will burn out over the coming months,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank. “We expect the RBA to cut and U.S. data to stay fairly robust, which will ultimately push the Fed into a rate hike.”

RBA Prepared

Australian central bank Deputy Governor Philip Lowe said last month policy makers are prepared to lower rates if needed to support demand. Traders are almost fully pricing in a reduction in the nation’s key rate to 1.75 percent in six months, according to data compiled by Bloomberg based on swaps.

The Aussie’s rally in the second quarter of last year was “instructive,” said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp. in Sydney. The currency strengthened from about 75.33 cents in April 2015 to more than 81 cents the following month, only to tumble back below 70 cents in September as a slump in China crushed prices of iron-ore, Australia’s biggest export.

“We’re feeling a bit of déjà vu,” Callow said. “The Aussie unwind should be a function of the Fed delivering two more hikes at some point this year and Australia’s key commodity prices unwinding much of this year’s rally.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE