Banks warn of headwinds ahead for Australian dollar

The Australian dollar is at risk of weakening further in coming months, with three of the country’s major banks warning of headwinds.

The Australian dollar is at risk of weakening further in coming months, with three of the country’s major banks warning that headwinds for the currency are stiffening.

The Australian dollar was trading at US73.75c at 4.45pm, little changed from US73.73c of late Friday.

Richard Grace, the head of global currency forecasting at the Commonwealth Bank of Australia, said selling pressure on the Australian dollar was likely to extend into next year as global growth slowed, commodity prices slid and interest-rate differentials with the US narrowed.

If Asian currencies were falling against the US dollar, so too would the Australian dollar, he said.

“Some 76 per cent of Australia’s exports are direct to Asia, and the Aussie is often used as a proxy for Asia.”

Meanwhile, National Australia Bank trimmed its forecasts for the Australian dollar, saying the recent devaluation of the yuan was a factor in its decision.

The NAB now expects the Australian dollar to finish the year at US70c before trading at a low of around US68c in the first half of 2016.

The revision reflects a likely rate increase by the US Federal Reserve in September and the recent trend towards lower commodity prices.

The move by Chinese authorities last week to allow greater flexibility for the currency market to set the level of the yuan will add to pressure on the Australian dollar and other Asian currencies, the NAB said in a research note.

Earlier, ANZ Bank senior currency strategist Daniel Been said the weakness in the yuan would invite “more downside risk to the Australian dollar”.

The Australian dollar was well correlated to the US dollar and Asian currencies because of central bank reserve diversification, he said.