EUR/USD: Flows. The euro-zone current account surplus continues to rise, while the US is stuck with a deficit. The combination of the ECB’s OMT programme and the eurozone escaping recession should help attract capital again. Trading accounts are likely still long EUR.
• Valuation. EUR/USD is not far from its PPP level. Also, our short-term models suggest that fair value for the cross is close to 1.35 at present.
• Risks. A prolonged US government shutdown could weigh on H2 activity data and/or provide the Fed with little visibility on the economy and postpone tapering as key releases are cancelled; this could weigh on USD. ECB may fail to react should short-end eurozone rates rise further as excess liquidity falls; this would support EUR.
Forecast: 1.33 (3M), 1.30 (6M) and 1.27 (12M)
AUD/USD: Flows. Speculators remain short AUD, which could limit further downside in the near term.
• Valuation. The recent fall in AUD/USD has brought the pair down to a level where overvaluation is only half of its postn)
• Risks. The summer sell-off in AUD has come about very fast and a near-term correction cannot be ruled out should China and or commodity prices surprise on the upside.
Forecast: 0.93 (3M), 0.90 (6M) and 0.87 (12M)
Conclusion. With the RBA now on hold and some carry currencies temporarily back in favour, we could see a pause in the AUD downturn. But looking into next year, AUD will have to fall and/or the RBA will need to cut rates to foster the rebalancing of the Australian economy as the mining boom fades. With a USD trough in sight, the potential for AUD/USD to edge lower thus remains in place. On a 3-6M horizon AUD/USD could remain under pressure as the struggling non-mining sector in Australia contrasts with a decent US outlook and the RBA and the Fed are likely to act accordingly.
