© Jonathan Cavenagh
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Jonathan Cavenagh
Currency Strategist in Singapore at Westpac
The Australian Dollar has been very strong since the start of the year and it is very much case that we have seen a lot of good news. However, the currency may be under selling pressure over the next month or so, probably in March rather than February.
The reason being is that the ECB is going to do its next LTRO (Long Term Refinancing Operation), which is a big credit balance sheet expansion whereby it will take dodgy assets of bank balance sheets in return for the cash. That is going to be a pretty big meaning for the Euro, but it is definitely going to be a positive moment for such currencies as the Australian Dollar. It is difficult to get in the down base in the Aussie Dollar in the near term taking into account the looming pressure. With that perspective then, perhaps we could see the pair higher in the next couple of weeks. We think it is starting to run out of steam and ultimately, we see it going lower as the global slowdown takes commodity prices lower and the RBA is forced to cut the interest rate further.
It is going to put renewed pressure on the Australian Dollar, therefore, our forecast for the pair is that it will be attempting to go back closer to parity by the middle of the year. We oversee the down-side risk into March and over the next few months hitting the mid-year and we think the poverty of news around Europe will dry up. Moreover, we consider that the US data momentum will slow, concerns about Asia will resurface and the Australian Dollar will struggle.
I assume the Australian Dollar and the New Zealand Dollar are going to enjoy the hard correlation with each other. If the Australian Dollar is weakening, then we expect the New Zealand Dollar to be falling over the same period. I guess we will put slightly more down-side risks to the AUD versus NZD. I believe that the AUD/USD can fall more sharply than the New Zealand Dollar. The Australian and the New Zealand cross is not going to move significantly over the next months.