Why the Aussie bears are wrong

Three reasons you shouldn't dismiss the Australian dollar just yet.

It seems most people are not buying into the recent strength in the Aussie dollar. 

In a recent poll by AAP (Economists see Aust dollar below US90c) only three of 17 analysts predicted a higher exchange rate at the end of the year. Despite being one of the three bullish ones calling for a rate closer to US97c, I understand some of the concerns for those dovish on the local unit. I too was bearish earlier in the year but changed my opinion on the factors I thought mattered most -- US interest rates, China's economy and Australian interest rates.

Currency forecasting has to be one of the more difficult tasks. One can only use the information at hand and make assumptions on the future so it’s understandable when forecasts are missed. When new information comes to hand, however, assumptions and forecasts get tested but these are also opportune times to make changes, if deemed appropriate.

Three signposts shift

Earlier this year, prior to the severe US weather storms, it appeared the road to recovery was underway and that the FOMC might be in a position to raise interest rates either at the end of this year or early next. But when the US central bank shifted the rhetoric and it became clear there would be a prolonged gap between the end of QE and higher rates, I started to change my view. This “anchoring” of rate expectations was enough for me to remove one of the factors that had the potential to move the Aussie dollar lower this year -- a stronger Greenback.

Another negative factor for the Aussie dollar was the slowing Chinese economy. When the People's Bank of China started to act and loosen policy it became clearer that we were getting nearer to the bottom of the economic cycle. Now with GDP growth rates seemingly based out around 7 per cent there is scope for growth to resume in second half of 2014 and into 2015.

The third major event was our own central bank shifting to a neutral stance. There is a chance the next move in rates can still be lower, especially if the recovery in the non-mining sector reverses. However a low unemployment rate, strong economic growth and elevated inflation are all pointing towards higher, not lower interest rates.

Although this week is light on domestic data with only Reserve Bank Deputy Governor Philip Lowe due to speak, next week will see key Australian economic data along with the final reading of the HSBC Manufacturing PMI and Non-Manufacturing PMI out of China. Judging by yesterday’s flash version of manufacturing PMI and the reaction on currency markets it appears the recent range in the Aussie had broken with the next short term target of US95c likely to be reached soon.

Graph for Why the Aussie bears are wrong

      AUD/USD hourly Chart                                                                    SOURCE: WWW.OZFOREX.COM.AU

With currency markets still bearish and positioned for more downside in the Aussie dollar I get the sense that when the RBA starts to hint at raising rates and China GDP accelerates then opinion towards the AUD/USD will turn. So I remain bullish the Aussie dollar in 2014, that is of course until the FOMC does get closer to moving rates higher which I don’t suspect will happen until the second half of 2015.

Jim Vrondas is Chief Currency strategist, Asia-Pacific at OzForex, a global provider of online international payment services and a key provider of Forex news. OzForex Group Limited, is a publicly listed entity with shares traded on the Australian Securities Exchange under the code "OFX".