Forecasters Negative on Australian Dollar as we Enter March

Aus dollar rates

The Australian dollar (AUD) enters March on the front-foot against the US dollar while showing a robust bid against the pound sterling.

However, forecasters at Bank of America Merrill Lynch (BofA) tell us they are confident that the AUD will trend lower in coming months.

Recent Australian dollar strength comes despite economic news-flow out of Australia having been largely negative in February.

Add to this the surprise 25bp rate cut by the RBA at the start of the month and you would not be faulted for questioning the AUD’s resillience.

Why would this be the case, and what clues does the current strength offer us concerning the outlook?

“As is often the case, this is symptomatic of a crowded trade and consistent with evidence that the market is very short AUD,” says Saul Eslake, Australian Economist at Merrill Lynch in Sydney.

This positioning may limit the near-term impact of a March rate cut, much as it did in February.

“Beyond the positioning risk however, we think the medium-term fundamental rationale for a weaker AUD remains compelling,” says Eslake.

Capital Expenditure Data Cause for Concern

The final week of February gave us a fresh reminder as to what could potentially lie ahead for the AUD.

The Capital Expenditure (CAPEX) report dashed hopes of a recovery in non-mining business investment.

The survey suggests that non-mining businesses expect to cut their nominal capital spending by 7% in 2015-16, while miners are looking to reduce capex by around 12% for the same period.

“The magnitude of the decline is surprising. With mining investment set to fall sharply over the next few years, today’s numbers suggest that the overall investment outlook remains very weak despite low interest rates, solid availability of finance and healthy corporate balance sheets,” says Felicity Emmett at ANZ.

RBA Will Want to Drive the Australian Currency Lower

Then there are the intentions of the Reserve Bank of Australia.

Eslake tells us:

“Australia's balance of payments reckoning for 2015 has yet to transpire and based on the RBA's communication, policy divergence will likely remain negative vs the USD, where Fed tightening seems imminent.

“Moreover, we believe the RBA will not dial down its concern around currency strength in its statement and risk undoing the "hard-fought" depreciation that has been achieved over the past few months. The risk of sizeable CNY depreciation adds to our bearish conviction on the AUD.”