AUD to remain low against USD despite narrowing rate differential – Westpac

In its weekly overview, the Westpac bank anticipates the Australian Dollar (AUD) to remain low against the US Dollar (USD) while forecasting one more rate cut of 0.25% from the Reserve Bank of Australia (RBA) in December. The reasons cited for the lack of AUD/USD upside include trade/political uncertainty and the market’s expectations concerning the future performance of the United States (US) and Australian central banks.

Key quotes

“The Reserve Bank delivered the October rate cut from 1% to 0.75% which had been one of our core forecasts since July. We are confirming our call for a further cut to 0.5% in February next year.”

“We acknowledge that there are risks that this move may come as early as December but dismiss the probability of a move as soon as November despite confident (50%) market pricing.”

“However we are encouraged that Chairman Powell puts a high weighting on extending the growth cycle for as long as possible. The target of core PCE (the FOMC’s preferred measure of inflation due to it containing the most information about forward prospects for inflation) is to be symmetrical around 2%. There is still much work to be done for that target to be achieved.”

“So, going forward, we are expecting one more cut in Australia and four more cuts in the federal funds rate. That implies “terminal” rates in this cycle of 0.5% in Australia and 0.875% in the US.”

“While we are expecting a narrowing of yield differentials between the federal funds rate and the RBA cash rate of 75bps, markets are already expecting a narrowing of around 50bps.”