AUD: Further decline to come in time - Westpac
|Elliot Clarke, Research Analyst at Westpac, notes that following a decisive shift down from USD0.78, during April-May, the Australian dollar has flirted with the USD0.75 figure on a number of occasions, but has been unable to sustain a break below.
Key Quotes
“This has been despite a significant (if short-lived) bout of political instability in Europe and a continuation of the US dollar uptrend. The question to ask is whether this stability is evidence of a low being found, or if it is instead merely a pause for breath in a longer downtrend. We continue to argue the latter, believing that the Australian dollar will inevitably lose altitude to USD0.72 by March 2019, and thereafter test USD0.70 in the second half of 2019. This view comes as a consequence of our expectations for the US and commodity prices.”
“Versus the RBA’s firmly on hold stance (amid uncertainty over the labour market and housing), three further rate hikes in the US will take the cash rate differential to –112bps against Australia by June 2019. Out along the curve, risks to inflation and fiscal uncertainty in the US are set to keep US government yields well ahead of those in Australia, further aiding the US dollar.”
“Even when US growth turns down in the second half of 2019 as tightening financial conditions bite, annual US GDP growth will still be running above potential while Australia lags below. Interest rate differentials will also remain against us over this period. It is for these reasons that the Australian dollar will edge lower still in the second half of 2019, even as the US dollar index (DXY) loses ground (the decline expected to be heavily concentrated in losses versus the Euro and Yen).”
“In addition to the US dollar acting as a lasting headwind for our currency through 2019, commodity prices will also be a clear negative over the 12 months to September 2019.”
“Now, given the above arguments pointing to the recent levelling in the AUD being a pause in a longer downtrend, the next question is why we do not see this downtrend carrying the Australian dollar below USD0.70. Chief among the reasons why is that demand for Australian financial assets remains abnormally strong.”
“During the mining investment boom, some five years back, there was a substantial increase in foreign direct investment in Australia to fund new production and export facilities. Interestingly, while activity investment in the mining sector has moved through a multi-year slump, foreign direct investment has held up.”
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