AUD forecasts revised but depreciation still anticipated – NAB

Analysts at NAB have adjusted their AUD forecasts lower, after in November when they suggested AUD/USD was heading into a 0.70-0.75 range, the USD was 5% stronger and the AUD/USD 0.76.

Key Quotes

“The sharp AUD appreciation in recent months (despite falls in the past few weeks) has challenged this view. We do however still anticipate a drop to at least the 75 cents area by end-18 (from 73 cents). NAB’s view that the RBA will be lifting rates in H2 2018 doesn’t meaningfully alter this given what is already priced into rates markets and risks the Fed may need to do more on policy than currently priced. At the same time, we cannot rule out that the US dollar continues on its recent indiscriminate downtrend, supporting further commodity price strength and the AUD along the way - this is a (fairly fat) tail risk, but not our central forecast.”

“In the rise in AUD/USD from 0.75 in early December to above 0.81, commodity prices were key. They swamped the influence rates differentials and risk sentiment. Yet to a large extent, commodity price gains are simply the flip-side of broad USD weakness and as such are really just acting as a USD proxy. Whether the strength of this negative correlation persists will be important in determining whether the AUD can divorce itself from the broader USD downtrend through the year. From a ‘fundamental’ perspective we see good reasons for iron ore and coal prices to come off this year, and our expectation for a somewhat softer overall terms of trade is one key factor behind our forecast for AUD cross-rate underperformance.”