The Australian dollar has seen its profile downgraded by currency analysts at a major French research house.

BNP Paribas have advised they are downgrading their Australian dollar forecasts given the fall in commodity prices, RBA pricing and light investor positioning.

Since the end of June, Australia’s basket of commodity prices has declined by 5% - this is significant for a country that is heavily reliant on exports as Australia.

BNP Paribas CLEER, the bank’s cyclical macroeconomic-based fair value model, suggests the commodity price decline justifies a fall in AUDUSD to 0.68 by the end of this year.

“This gauge of fair value warrants attention as it is similar to an approach used by the Reserve Bank of Australia (RBA). We think they will be uncomfortable with the relative stability in the AUD,” says Sam Lynton-Brown at BNP Paribas in London.

At present it appears markets are attaching a low risk to the RBA cutting rates once more with less than a 50% probability of a 25bp cut priced in over the next three policy meetings.

“While this is also our economists’ base case, they note that a stubborn AUD could force the RBA to cut,” says Lynton-Brown.

Furthermore, BNP Paribas Positioning Analysis signals that FX investor positioning is light in the AUD, with a score of -12 on a scale of 50 to -50.

“This suggests there is scope for investors to build short AUD positions if rates markets begin to price a greater chance of RBA easing,” says the Australian dollar forecast note.

BNP revise (previous in parenthesis) their forecasts for AUDUSD to 0.71 (0.74) for the end of Q3 2015 and 0.70 (0.74) for the end of 2015, with a trough at 0.69 (0.73) at the end of Q1 2016.

There Will be a Recovery in 2016

While the near-term forecasts for a weaker Australian dollar are shared with the majority of institutional analysts we are in touch with we do note that BNP Paribas do see a recovery in the Australian dollar over 2016.

“Looking beyond the medium-term headwinds, we think there is potential for a firm AUD rebound. The USD bull run is likely to fade around H2 2016 and, coupled with a pickup in global demand growth, our commodity strategy team anticipates a recovery in commodity prices,” says Lynton-Brown.

Given that the AUD is substantially cheap from a long-term valuation perspective relative to its BNP Paribas FEER of 0.92, it therefore has scope to bounce back.

NZ Dollar Still Deemed too Expensive

Meanwhile, the New Zealand dollar is widely also expected to suffer further downside in coming months.

The NZD saw some turbulence in the wake of comments by RBNZ chief Graeme Wheeler who once again stated that further depreciation of the currency is required.

“The kiwi dipped then rose in aftermath of his comments as traders reacted to the idea that RBNZ may not necessarily lower rates just yet, but as the European session dragged on the kiwi gave up its gains to trade near the lows of the day,” says Boris Schlossberg at BK Asset Management.

The pair has been completely beaten down by the shorts as the steady decline in commodity price and the slowdown in China have exerted its toll on the unit.