Australian dollar: UBS and Westpac offer differing views on where the Aussie currency is headed

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Category: Australian Dollar News

Written by Rob Samson

The Australian dollar (Currency:AUD) is under-performing the 'safer' currencies this morning as markets take a breather from recent impressive gains. We see:

The pound Australian dollar exchange rate is 0.27 pct higher at 1.5406.

The euro Australian dollar exchange rate is unchanged at 1.2448.

The Australian dollar to US dollar rate is 0.21 pct lower, AUD/USD is at 1.0529.

Speculation continues to mount that the Australian currency is set to slip should the boom in the Australian commodities sector continue to cool.

This view is articulated through the most recent trade recommendation issued by UBS. Gareth Berry at the Swiss bank says:

"We recommended buying a six month 0.9975 AUD/USD digital put costing 1.0125% to make 5.0% at a spot reference of 1.0606. This is a trade idea to profit from the risk of the Australian dollar sliding if the country's mining boom ends earlier than anticipated. With iron ore prices having slumped and some key mining projects in Australia
having been delayed, the currency is at risk if the mining companies' large capital expenditures peak earlier than the next one to two years that is the RBA's current base case."

Investors should consider buying long dated out of the money downside options to capture a decisive turn in sentiment in the future against the Australian dollar.

A draft RBA paper cited by Bloomberg reports that 15 central banks certainly hold the Australian dollar as part of their FX reserves, while 8 more possibly hold a portion of their reserves denominated in the currency.

That said, the technical indicators are hinting at continued Aussie strength. In their morning comment Westpac offer a contradictory view to that held at UBS, the Australian bank this morning says: "Bulls should remain in control multi-day/week given the ECB backstop, Fed QE3 and stabilisation in iron ore prices, targeting 1.0650/1.07. It is hard to call higher levels however, given long spec positioning, the ongoing risk of RBA easing as soon as 1 Oct and ongoing deceleration in key Asian export destinations."

Westpac advise that they expect the USD to remain soft into October as it both loses safe haven demand and is sold on the assumption that QE3 will undermine its value as some newly created dollars end up being sold for other currencies.  

Advising on the EUR/USD pairing the bank notes: "Last week’s stretch targets (1.33-1.34) are this week’s base case, as the Fed’s open-ended QE provides further impetus for specs to unwind lingering shorts. Whether Spain applies for ESM/ECB help near term shouldn’t be vital."