Opinion on the direction of the Australia dollar is becoming increasingly polarised.Fears Australian dollar facing “benign collapse” to US66¢
Deutsche Bank may be tipping a collapse of the Australian dollar, but rival investment bank Bank of America Merrill Lynch is taking a bullish view and is betting on further gains back towards US93¢ in the short term.
Debate about the direction of the Australian dollar over the next year comes as cold weather clouds the economic recovery in the United States and as global central banks look to normalise interest rates from historically low levels.
Bank of America Merrill Lynch technical strategist MacNeil Curry said the Australian dollar is set to resume its “bull trend” as a two week old phase of contraction draws to a close.
The investment bank has a buy recommendation on the currency at US89.9¢ and is targeting US92.69¢. The Australian dollar is trading at US90.19¢ at 1pm AEDT, which is about 0.18 per cent lower than where it was at 7am this morning.
“The impulsive gain from the US86.58¢ January 24, low says upside targets are seen to the confluence of resistance between US92.69¢/US93.38¢. Further supportive of the bullish view is the potential for a short squeeze, as positioning remains at bearish extremes. Pullbacks should not break US89.36¢,” he told clients on Monday.
The prediction comes as data shows that speculators decreased their short positing in Australian dollar futures to -$4 billion from -$4.3 billion – which suggests that less traders are selling the currency.
On Monday, Deutsche Bank gave one of the most bearish forecasts for the Australian dollar saying it could face a “benign collapse” to US66¢ by the end of next year amid falling commodity prices, declining mining investment and reduced government spending.
Westpac chief currency strategist Robert Rennie said he sees merit in both views but maintains that the currency will be around US85¢ at the start of 2015.
“Certainly views are becoming more polarised. But our view is that we will see a modestly weaker Australian dollar but not significantly so.”
He added that with demand for Australian resources experts to increase over the coming years, particularly for iron ore and liquified natural gas, this will be offset by the actions of central bank policy makers in raising interest rates offshore.
Around US70¢ is considered the long term average for the local currency. But after the 2008/09 financial crisis, weakness in the US dollar saw investors buy into alternative and commodity linked currencies such as the Australian dollar – which at the start of last year was trading as high as US1.05¢.
Part of the reason why the Australian dollar rose above parity with the US dollar after the financial crisis was due to investors seeking to take advantage of the carry trade and buying currencies with higher interest rates and selling those with lower rates.
Whilst Deutsche Bank is eyeing off a significant pull back in the local currency, there are others who share the more bullish view of Bank of America Merrill Lynch.
Former Citibank chief economist is also bullish on the local currency and in a fresh blog post said “the Australian dollar has already had its sell-off, dropping from $US1.10 in July 2011 to US86.6¢ just last month. The peak to trough fall is over 20 per cent.
“Down at around US87¢ or US88¢ was the time to get in because the pick up, back to around US90¢ at the moment, is just the start of trend that should see the AUD move back to US95¢ and then above parity.
Meanwhile, economist and author of the brushTURKEY report, Clifford Bennett believes the currency was now on its way to US97¢ once again.
Mr Bennett’s track record includes being the first to forecast the Aussie dollar to rise above parity with US dollar, in 2006 when AUD/USD was US76¢.
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