AUD: Supported in 2017 - Westpac

The past two months have seen a substantial rally in commodity prices as since mid–June, iron ore has risen from USD53 per tonne to USD76 in early August and also supportive has been a lift in coal prices, thermal coal increasing from USD81 per tonne to USD99, as well as a rally in crude oil, the Brent benchmark rising from a mid–June low of USD45 per barrel to around USD52 in early August, which has resulted in the strength of AUD, explains Bill Evans, Chief Economist at Westpac.

Key Quotes

“As a result of this broad–based rally, our Australian commodities index currently sits at 234, 10% above its level at the time of the release of our June Market Outlook publication.”

“Foreign exchange markets have, unsurprisingly, reacted quickly to this shift, with the Australian dollar rallying from USD0.75 to just below USD0.79 currently, following a peak of USD0.80 in late July.”

“The rally in commodity prices and associated currency market reaction has seen us revise our near–term outlook for the Australian dollar higher.”

“At September, we now look for the Australian dollar to trade at USD0.78, a touch below the current spot level. Past this point, we rely on our assessment of the global economy and our structural fair value model to guide our forecast for the currency.”

“Markets are anticipating only one more hike by the Federal Reserve through end 2018 while we are maintaining our call for three, with the next move coming in December to be followed by June and December next year.”

“On the other hand, markets are pricing in around one 0.25% rate hike by the RBA next year whereas we expect rates to remain on hold.”

“The net effect of these differences is that we see AUD rates around 0.4% below US rates by end 2018 whereas markets are expecting AUD rates to remain around the current configuration of 0.4% above US rates.”

“Accordingly, taking all these factors into account, we have revised up our target level for the AUD by the end of 2018 from USD0.65 to USD0.70.”