AUD: Weakness ahead – Westpac

According to Westpac analysts, AUD should weaken Q1/ Q2 2020 as the impact of the forecast Feb and June RBA rate cuts plus the beginning of a weakening in iron ore prices ($80 by June) kicks in.

Key Quotes

“Given that the impact of QE on exchange rates tends to be front-loaded and if we are correct and the RBA cuts again in June and then moves to QE, then building expectations for QE are likely to be a negative for the currency through Q2 as well.”

“A dip below 0.65 is certainly within our playbook for Q2 next year. Indeed, the midpoint for our fair value model is projected to be 0.6380, assuming the above policy rates and commodity prices. However, offsetting some of that fair value weakness, we see the US$ trend acting as a source of support for the A$. Indeed, as the year progresses, our official forecasts have the A$ starting to appreciate as the US$ weakens.”

“Bottom line we remain of the view that the A$ will weaken further in 2020 and we see Q2 as the point at which the low will likely be seen. A dip to 0.65 is certainly within our playbook, thus we would view any strength through the end of the year to 0.6950 as an opportunity to sell.”

“Beyond H1 next year, we see the trend reversing as US$ weakness becomes a more important driving factor and would like to use weakness seen in Q2 as an opportunity to buy.”