We are bullish on the Australian dollar in the long term. The effects of fall in commodity prices has largely been priced in the dollar today. Going forward, the cushion of the fall in the dollar will support economic growth and ensure unemployment will remain low.
Foreign exchange trading is a relative bet on going long one currency and short another. It is not enough to say the Australian dollar will rise, but it must rise against another currency.
In our Australian dollar forecast we outlined the positive long case for the AUD/USD rate going forward. Below are some couple quick comments on EUR to AUS dollar exchange rate.
Unlike AUD to NZD exchange rate which is a direct cross rate where changes are based on the relative economic outlook and sentiment. Our experience from trading the EUR to AUD cross rate is that movements in this cross rate is determined by overall movements on the EUR to USD exchange rate relationship.
The prevailing view of the Aus dollar to Eur is that while Australia is negatively impacted by the fall in commodity prices. Europe is facing much bigger issues from continue economic weakness to possible risk of Brexit and unsolved European banking time bombs.
We are slightly more sanguine on the downside risk for the EUR. Given the risks and weakness of the European economic condition is well known, we feel that significant portion of the risk has been priced in. These are what you called known known risks. In the case of Australia, a known known risk the potential house bubble in Sydney.
The decline in the oil price has given an artificial stimulous to the European consumers which will help overall growth verses prior periods.
The key downside risk is the known unknown risk to the EUR which will have wider implication on the Euro to Australian exchange rate. Examples of these risks include unforeseen consequences of further unconventional monetary policy by ECB.
Also as the European economy heavily relies on direct bank lending as key credit flow channel unlike the US economy which has a healthy capital market. Further deterioration of the banking sector can spread to the the wider economy.
The Euro has shown surprising resilience against the US dollar since the start of the year. We will not be surprised of further upside as the Euro rally outpaces the rate in which the Australian dollar appreciate against the US dollar. This will support the rally in the Euro to Australian dollar exchange rate.