Australian dollar outlook: Forecasters see short-term weakness, long-term stubbornness to persist

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Category: Exchange Rates

Published on Friday, 31 August 2012 13:50

Written by Sam Coventry

The outlook for the Australian dollar remains promising, this despite signs that the global economy could continue weakening in the near-term.

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The Australian dollar (Currency:AUD) is forecasted to maintain its long-term strength, however, we could be in for a nearer-term correction lower.

This viewpoint is forwarded by the team at ANZ Research and comes at the close of a weak that has seen the Australian currency weaken in line with falling iron ore prices.

Please visit our IMT site, to see the latest Australian dollar forecasts.


ANZ note that cracks have started to appear in the outlook for mining investment further out, this despite data released this week that confirmed mining investment will continue to grow very strongly over the next year or so.

"Despite the clear slide in commodity prices recently, over the near to medium term the Australian dollar could be expected to remain above levels implied by commodity prices alone. Behind this divergence is embodied an expectation that demand for Australian dollar assets from international investors will remain strong. A lack of return in core bond markets and further expansion in some of the central bank sheets is likely to see diversification flows into the Australian dollar continue for some time," say ANZ Research.
 
Some realignment with weak global growth and falling commodity prices is likely in the short term and this will ultimately weaken the currency.

And certainly if the slowdown apparent in China intensifies absent a policy response, we would expect a sharp depreciation.

"But this is not our central scenario. We expect any near-term softening to be shallow and that the depreciation runs into solid demand from global asset diversifiers. As such, our forecasts over the next two years expect the currency to remain at levels somewhat above parity, in spite of the weakening of key commodities," say ANZ Bank.