According to Elliot Clarke, analyst at Westpac, US/Australian interest rate differentials and commodity prices remain key for AUD/USD valuation.
“Looking ahead, while we now expect the FOMC to cut the federal funds rate twice in 2019 (in September and December), the current market expectation of essentially another two cuts in 2020 is, to us, unwarranted. Therefore, with the market having priced too many cuts in for the US and still yet to bring the timeline of the remaining two cuts for this RBA cycle into line with ours, we expect the Australian dollar to depreciate in coming months.”
“From USD0.6960 currently, we look for our currency to fall to around USD0.68 in the second half of 2019, then to USD0.66 in the first half of 2020. The pall over Australia’s economic outlook is thicker and slower moving than the US, and so only a very modest lift in the second half of 2020 can be expected – to USD0.67.”
“In the three months to March 2019, the direct investment flow looks to have come to a halt. Versus the $79bn inflow of 2018, the most-recent quarter saw a annualised net direct inflow of just $3.2bn. In part, this was because Australian firms invested more offshore in the quarter. But, given growth fundamentals and the outsized gains of recent years, it seems appropriate to assume that future direct inflows will be materially smaller than the past seven years. This points to the end of an extraordinary support for the Australian dollar and, as a result, our currency becoming more susceptible to downside shocks.”
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