The AUD rally should stall if the RBA cuts interest rates this May say Bank of America who expect the currency to be range-bound over the coming month, and see it remaining bearish beyond.

The Australian dollar has strengthened over recent weeks with buyers pushing it towards the best levels of 2015 against the US dollar.

At the same time the currency has maintained a range-bound tone against the British pound with sterling unable to push back towards the year’s best exchange rate at 2.0 GBPAUD.

Both the US dollar and sterling could however eventually be afforded the chance to push higher according to Bank of America Merrill Lynch who have released their latest currency forecast ahead of the May interest rate decision at the Reserve Bank of Australia.

Is it Time for the RBA to Cut?

The AUD was punished at the start of 2015 when the RBA joined other global central banks in cutting interest rates.

The move was unexpected and analysts quickly started pricing in an additional interest rate cut soon after – history shows the RBA tends to deliver cuts in quick succession.

As we enter May that cut has still not been delivered; the Australian dollar has recovered lost ground on the foreign exchange market place as a result.

Is May going to deliver that promised cut?

Yes suggest Bank of America Merrill Lynch Global Research who are basing a lower AUD profile on an expected May cut.

Economists and markets have struggled to accurately forecast the RBA’s month to month intentions.

This is despite the Bank holding a clear easing bias.

“In our view, the delay in cutting further comes because of the predicament the RBA finds itself in. In the current environment, easing rates further likely brings limited reward. But it would almost certainly bring increased risks,” says a note from Bank of America to clients.

Like New Zealand, the key risk posed by an interest rate cut is unduly further inflation house prices.

House prices aside, Australia finds itself in a state of low inflation – something that would allow for an interest rate cut.

Furthermore, economic growth has not picked up materially, and this will be the focus of the RBA decision makers who are keen to underpin economic strength.

“After weighing up this trade-off we expect that RBA will cut rates again at its May meeting,” say BofA.

What Does it Mean for the AUD?

The recent climb in the Aussie to US dollar exchange rate back above US$0.80 will make the Bank a little uncomfortable and decision makers will be keen to push the currency lower.

A lower currency will help keep Australian-produced goods competitive on the global markets, an important consideration for authorities keen to rebalance the economy away from a perceived over-reliance on mining.

Note that the dangers of this reliance have been made all the more real with the inability of the key export of iron ore to rebound.

“We are not convinced that in the current environment the RBA cutting rates will materially lower the exchange rate. But not doing so would likely support the recent rally,” say BofA.

In addition:

“If the RBA do ease policy we expect them to continue to hold an easing bias. Not because we think they will cut rates again, we don’t, but to keep downward pressure on the A$ which will be important, while the RBA waits for the Fed to tighten.”

As such Bank of America forecast the AUD rally to stall if the RBA cuts.

“We expect it to be range-bound over the coming month, and see it remaining bearish beyond,” say analysts.

BofA continue to expect AUD-USD to reach the low-0.70s by end-2015 and forecast a move to the 0.60s in 2016.

This bearish view chimes with a number of other negative views currently at hand.

ANZ Bank are another leading institution pricing in an imminent cut, this despite the inflation figures released in April.

BMO Capital shares the view that rates will be cut and are pricing in a weaker Australian dollar as a result.

The RBA meeting comes on Tuesday the 5th of May.