The RBA will remain hesitant to say that they need to start raising rates

David Forrester, Senior Vice President for G10 FX strategy at Macquarie Bank, on RBA and Aussie

In the minutes of the previous RBA monetary policy meeting it was stated that if the economy evolves as expected, then most likely there will be a period of stability in interest rates. Do you support their decision or you think that they had to the interest rates?

From our point of view (the Macquarie FIC strategy team), the Reserve Bank of Australia is increasingly pointing out things that they have done to support country's economy. The RBA will remain hesitant to say that they need to start raising rates; however, given the drag on the economy to occur in the second half of the year due to the fall in the mining investment. We think that they are correct in pointing to the most prudent course of action is a period of stability in the interest rates.

What performance do you expect from the Australian Dollar versus its major counterparts during the second quarter of this year?

We expect that it could squeeze a bit higher. The bottom line is that the local economy is improving and on top of that there is an increasing real money or long term investor interest in Australian dollar assets. The main reason for that is the fact that their currency has fallen about 10-15% from levels seen in April last year; therefore, long term investors feel more comfortable buying Australian Dollar assets. Current trading levels might be much closer to currency's fair value than ones last year, when the Aussie was clearly overvalued. In our opinion, ultimately AUD/USD will fall, perhaps towards the middle of the year or a little bit later once the U.S. Dollar starts to strengthen again and as soon as U.S. economy shakes off its winter doldrums.

What will be the main drivers for the Aussie during the second quarter of this year?

We will continue to look towards China. At the beginning of this year, our economists had a growth outlook for China to bottom out around 6.8% by the middle of the year. In my opinion, after the recent PMI data the markets have come around to our economists' way of thinking. That has already weighted a bit on the Aussie; therefore, going forward the market will be carefully on the lookout for more stimulus out of China. We do not think that there will be a big stimulus, nevertheless, we do look towards two RRR cuts, which will help support AUD/USD and its hard commodity export prices.

The other factor is the local economy, which we expect to further improve. The RBA's rate cutting cycle is taking hold in country's economy, thus I would not be surprised to see at some stage during the second quarter that the market begins to price in rate hike by year end. On top of that, the other driving factor will be the U.S. Dollar's and the US economy's performance.

What are our forecasts for AUD/USD and AUD/JPY for the second quarter of this year?

For the AUD/USD pair we expect it to finish the quarter at around 0.92. However, assuming that there will be a lot of positive fundamentals for the Aussie - real money investor demand for Aussie assets, also a stronger local economy. But, stabilization and improvement in U.S. data will bring AUD/USD lower.

AUD/JPY will be driven by the Bank of Japan and how much time it will take for them to engage more QQE (quantitative and qualitative monetary easing). We have a forecast of 98 Yen per Aussie for the end of the second quarter. Moreover, we do think there is a good chance that the BoJ will engage more QQE by the end of Q2 or early Q3.