The Australian dollar is likely to rise during the short term, as currency markets reposition after the Reserve Bank of Australia's surprise decision to keep interest rates on hold.
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The RBA on Tuesday left the official cash rate on hold at 2.25 per cent. Many had been expecting the central bank to cut rates for the second month running. At its highest point, markets had priced in a 93 per cent chance of a 25 basis point cut.
Markets now believe there is a 49 per cent chance the RBA would cut rates in April and is also pricing in 50 basis points of cuts in the next 12 months.
Trading as low as US77.56¢ on Tuesday, the Aussie had pushed up to US78.16¢ in afternoon trade on Wednesday.
The dollar was little moved by gross domestic product numbers that showed Australia's economy grew 0.5 per cent in the fourth quarter of 2014, an uptick from the 0.3 per cent rise seen in the September quarter.
BlackRock Australia head of fixed income Stephen Miller said while he expected at least one more rate cut this year and a lower dollar, the RBA's decision to hold pat meant the currency could inch higher in the short-term.
"Markets were looking for the RBA to cut yesterday and were probably positioned for the RBA to cut yesterday and there's the possibility of a short-term positioning squeeze coming in," Mr Miller said.
The local currency could push up to as high as US79.5¢, which would force "weak shorts" out of the market, Mr Miller said.
"But, I think if you see those sorts of levels, it might be a good idea to want to re-enter shorts," he added.
Since September, the Australian dollar has fallen almost 17 per cent against its American counterpart. However, against a basket of trading-partner currencies, it has dropped under 8 per cent.
This suggests that much of the fall against the US dollar is due to the strength of the greenback, rather than weakness in the Aussie. The RBA has often pointed out that the falls in the currency have not matched those in Australia's most valuable commodity, iron ore, which halved during the past year.
Given the weakness in the local economy, poor capital expenditure numbers and expectations, Mr Miller said the Australian dollar could hit US70¢ by the end of 2015, as long as the US Federal Reserve begins normalising interest rates.
On a long-term basis, taking into account inflation, terms of trade and productivity, the Australian dollar should find a fair value in the high-US70¢ range, State Street global advisers head of portfolio strategists Asia Pacific Jonathan Shead said.
"The further it is away from that level and the longer it holds, then the more likely you are to see something snap back," Mr Shead said.
"Given the upward trajectory for US rates and the, at least, on-hold, or more-downward side of Australian rates, clearly that means that the carry for Australian investors hedging back into the Aussie dollar is going to start to contract. That will come into play in the next year or so."