Aussie Revival Seen in Record Shorts, RBA at Turning Point

(Bloomberg) -- Traders have never been as negative toward the Australian dollar as they are now. That is just one of the reasons that will help it recover, strategists say.

Other positives set to drive a rebound include expectations the central bank can’t get any more dovish than it is now, and the fact that many commodities Australia exports are rising apart from iron ore, according to Credit Agricole SA. The Aussie will be bought once Covid-19 lockdown exits are confirmed, Canadian Imperial Bank of Commerce says.

“Our short-term fair value model points to the Aussie-U.S. dollar being nearly three standard deviations below its fair value based on relative Australian-U.S. rates and commodity prices,” said David Forrester, a foreign-exchange strategist at Credit Agricole in Hong Kong. “The next 100 to 200 pips for the Aussie is likely higher.”

The Aussie has dropped 1.6% in September, heading for a fourth month of losses, as rising virus infections lead to widespread movement restrictions. Short positions on the Aussie-U.S. dollar currency pair climbed to 85,584 in the week to Sept. 21, a record high in data from Commodity Futures Trading Commission starting in 1992.   

The Reserve Bank of Australia has been vindicated in its view that the spread of the delta variant presented downside risks, but at the same time the central bank has now probably reached “max dovishness,” Credit Agricole’s Forrester said.

“With Australia’s vaccination rate fast heading toward the 70%-to-80% levels where the economy will begin opening up again, the economic data from November onward will begin surprising to the upside,” he said.

Commodity Picture

While there has a lot of focus on tumbling iron-ore prices, there have been strong rallies in Australia’s other important commodity exports including liquid natural gas, coal and base metals, Forrester said.

Credit Agricole projects the Aussie will rise to 75 cents by year-end, and reach 77 cents by mid-2022, according to data compiled by Bloomberg.

Australia’s currency trimmed some of its September losses Thursday, rising 0.4% to 72.05 U.S. cents, as iron ore rallied.

Others remain bearish.

The main Aussie risks are to the downside given that local policy makers are lagging behind their U.S. counterparts in withdrawing stimulus, according to Nomura Australia Ltd.  

“The RBA is more dovish than the Fed, and Governor Lowe’s aggressively-dovish cash rate guidance from mid-September is still ringing in our ears,” said Andrew Ticehurst, a rate strategist at Nomura in Sydney. “Market nervousness about global central bank unwinding of accommodation could send the Aussie lower on risk-off too.”

Other reasons to sell the currency include the likelihood of macro-prudential tightening by the government that will mean less pressure for the RBA to reduce stimulus, he said.

‘Aussie Buying’

CIBC agrees there are short-term risks for the Aussie but sees a prospect for a swift economic recovery that will boost the currency into 2022.

“We see very strong support in the range of 70 to 71 cents and expect that to continue to be the low end of the range in coming months before eventual recovery in 2022,” said Patrick Bennett, head of macro strategy for Asia at CIBC in Hong Kong. “Confirmed lockdown exits, and activity recovery will promote Aussie buying.”

The currency will strengthen to 74 cents by June and reach 75 cents by September, he said

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