Dollar treads water in late trade

The local unit may be set for further losses in coming months as global and domestic forces combine.

Already the second-worst performing G10 currency in 2016, the outlook for the Australian dollar could be further losses in coming months as global and domestic factors combine against it.

At 6.25pm (AEST) on Thursday, the Australian dollar was trading at US71.86 cents, compared with US71.97c at the same time on Wednesday.

Chris Weston, chief market strategist at IG Markets said an analysis of the forces acting on the Aussie dollar “largely point to further downside with the base case being that the Australian dollar trades below US70c in the coming months.”

All eyes are on next week’s first-quarter GDP growth data, amid expectations it will show some slowing from the stellar 3.0 per cent on-year growth posted in the fourth quarter, he said.

Any sign of a sharp slowdown in the economy will spur talk of more interest rate cuts in the second half and prompt more weakness in the Aussie dollar, Mr Weston said.

And with the US Federal Reserve appearing closer to raising interest rates, the ability for the Australian dollar to rally will be limited, traders said.

“Impending risks are not fully priced into the Australian dollar and it is likely to be lower by the end of the year,” said Daniel Been, currency strategist at ANZ currency strategist Daniel Been said.

“Interest rate differentials are narrowing, while recent price action suggests limited upside for key commodity prices,” he added.

The iron ore price has likely peaked for now, while market pricing of the probability of a Fed rate raise has increased, Mr Been said.

“We think the risk is that these trends extend. In particular we are concerned that interest rates between Australia and the US will continue to narrow,” Mr Been said.

ANZ’s modelling suggests the Aussie is still trading above “fair value” despite its sharp reversal in May after a surprise interest rate cut on May 3.

“With risks skewed to the downside, we remain comfortable with our target of US67.00c by end-2016,” he said.

Morgan Stanley also lowered its forecasts for the Reserve Bank of Australia’s cash rate to 1.0 per cent this week, saying the economy is set to slow sharply.

Daniel Blake, economist at Morgan Stanley said drivers of growth in Australia are becoming fewer, and he predicts the economy will average annual growth of just 1.9 per cent over the next four years.

The “double unwind” on a mining investment boom and a residential housing construction boom will depress growth for some time, he said.

Morgan Stanley expects the Australian dollar will be trading at closer to US65.00 by the end of next year as the economy slows, unemployment rises and the RBA is forced to slash rates.