Australian Dollar Forecast Update: RBA Will Not Cut Again Say BofA

Bank of America foreasts for the Australian dollar

A new research note from Bank of America Merrill Lynch (BofA) suggests the Reserve Bank of Australia (RBA) will not to cut interest rates again in 2015.

It is instead argued that the next move made on rates by the RBA is an increase - a significant observation with regards to the AUD's outlook.

This could occur in 2016 suggests a note entitled “Another ‘period of stability’ before the RBA hike” issued on Friday the 3rd July.

This is significant as the premise of a weaker Australian dollar over coming months rests with the view of further interest rate cuts at the RBA.

In global FX the general rule applies where falling interest rates are mirrored by a falling currency.

Should the RBA keep rates on hold and markets begin factoring higher rates ahead we could well see the AUD start to strengthen.

The news comes as the British pound to Australian dollar exchange rate (GBPAUD) pushes higher to above 2.08 towards its best levels since 2009.

Average levels being put fortwarded by your average UK bank prices in a rate of 2.0192 while independents are quoting closer to 2.0525. We are therefore looking at a potential gain of 3300 AUD on payments being achieved for every 100K GBP transferred.

The Australian to US dollar exchange rate (AUDUSD) is meanwhile seen trading lower at 0.7525, its lowest point since 2009.

Momentum is certainly pitted against the Aussie and views such as this being forwarded by Merrill Lynch will be welcomed by those hoping for a stronger AUD.

However, even this seemingly pro-AUD report factors in a lower exchange rate in the near-term before gains start to materialise.

Altered Forecasts

Australian dollar outlookBofA Merrill Lynch’s Alex Joiner says the Australian dollar is in for another period of stability before rates rise.

“After reviewing our expectations for the economic outlook in recent weeks, here we also now revise our forecasts for monetary policy. Our expectation is now for the RBA to keep policy rates on hold for an extended period of time before commencing a gradual tightening cycle in the fourth quarter of 2016,” says Joiner.

This will likely be followed by another hike in early 2017 and perhaps two more later that year - bringing the cash rate to 3.0%.

“This forecast assumes the Australian dollar keeps depreciating to US$0.73 by the end of 2015 and US$0.68 by the end of 2016,” says Joiner.

BofA also acknowledges there are risks of another rate cut but they reckon that on balance the bar is set too high for such a move.

The RBA has form in opting to make no changes to policy settings for protracted periods of time with an eighteen month period from August 2013 to February 2015 setting precedent for the RBA doing nothing.

It is expected this period of standing by will be repeated from the most recent cut in May after which time analysts anticipate that the next move in policy rates will be upwards.

Weaker Australian Dollar in the Short-Term

While the longer-term prospects are arguably positive for the Australian dollar – based on the mentioned assumptions on interest rates – the short and medium-term could yield further losses for AUD.

“Medium-term however, we continue to expect AUD to weaken due to policy divergence with the US, weak commodity export prices and a decline in capital inflows to the resource sector. The fundamental "big picture" remains negative and we believe the exchange rate will need to stay below “fair value” if it is to provide any degree of support to the economy,” says BofA FX Strategist Adarsh Sinha.

In BofA’s view, the RBA will continue to use its policy levers if needed to achieve this. We expect AUD/USD to end 2015 at 0.73 and 2016 at 0.68.

“We stay short AUD/JPY targeting 90 (current level: 93.30),” says Sinha.

With the Bank of England tipped to follow the lead set by the US Federal Reserve and raise interest rates in 2016 a path of appreciation could be taken by GBPAUD.