Analysts have trimmed their forecasts for the Australian dollar but still expect moderate gains by year-end, while its New Zealand counterpart is also seen ticking higher even as markets price in the risk of interest rate cuts in both countries.
The Aussie is expected to remain around current levels of $0.7100 in three months' time, down from $0.7200 expected in the previous poll in March, according to the median prediction of up to 55 analysts in a Reuters poll. The Aussie has traded in a 70-73 US cent range since the start of this year and analysts expect more of the same for the next 12 months.
The median forecast was for $0.7300 for a year ahead, compared with $0.7400 in March. That is still a brave call given an increasing number of economists are calling for two rate cuts this year. Financial markets are fully pricing in the probability of at least one cut later this year.
The Aussie was among the worst performing major currency last year, falling nearly 10 percent to a low of $0.7017. "The AUD started the year with a return of its trademark volatility. With global market sentiment now looking a touch stretched, we do not think that the international environment will provide a positive backdrop for much longer," said Daniel Been, head of forex research at ANZ.
"Growth is slowing and liquidity is tighter. The domestic data are likely to rremain below par," Been added Australia's economy slowed sharply in the second half of 2018. That combined with sliding home prices and sluggish wages was enough to convince investors the Reserve Bank of Australia (RBA) will have to cut interest rates this year.
The RBA has shown reluctance to cut rates largely because the labour market is going strong, with the jobless rate at an eight-year trough of 4.9 percent. In addition, Australia's exporters are enjoying boom times with the country's trade surplus in February touching record highs. The RBA's conundrum could explain the wide range of forecasts for the Aussie on a 12-month view - from as low as $0.6500 to as high as $0.81 - highlighting the challenge of predicting currency moves.
The median forecasts were also kind to the kiwi, putting it at $0.6800 in three months and six months, and $0.7000 on a one-year view, all unchanged from the previous poll. The currency was at $0.6756 on Friday, having slipped in the past month as investors also narrowed the odds on a cut in New Zealand rates.
Overnight indexed swaps, which track expectations for official rates, have dropped to 1.46 percent for a year ahead, well under the current 1.75 percent cash rate. Yields on two-year bonds had broken down to 1.50 percent, a long way from the November top of 2.02 percent. "The NZD is showing surprising resilience," ANZ Been's said predicting the kiwi at $0.6300 on a 12-month horizon. "While it is no longer trading above $0.70, it has substantially outperformed its peers. We do not see this as sustainable."
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