BARCLAYS: The Australian dollar is likely to come under ‘significant downward pressure’

The Australian dollar is currently overvalued by as much as 9%. Given this anomaly and forecasts for additional commodity price weakness in the year ahead, further weakness is not just possible but likely.

That’s the succinct view of currency strategists at Barclays who believe persistent weakness in commodity prices, along with a relative dearth of domestic economic data, will likely weigh on the Aussie dollar in the period ahead.

Here’s a snippet from a research report released by the bank overnight explaining why:

If commodity prices and the currency hold at current levels, this suggests that the real exchange rate will start next year 9% overvalued, which is well above a one-standard deviation divergence of 6.5%. With a collapse in real resource share prices pointing to a deeper slump in export prices, we estimate that fair value could fall a further 6% next year.

The chart below, supplied by Barclays, reveals the historic relationship between the AUD/USD and Australia’s terms of trade.

Barclays expect that recent weakness in the Aussie will likely extend in the weeks ahead “with little on the data front to give any support to the currency”.

Beyond that, the bank believes that the currency is likely to come under “significant downward pressure” in the year ahead, forecasting that the AUD/USD will fall to 63 cents by the end of 2016.

While not the lowest forecast for the currency next year, Barclay’s call sits considerably below the median forecast for the Aussie to finish next year in the high 60 cent region.

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