Why the selloff in the Australian dollar may continue for some time yet, in one chart

Picture: Getty Images
  • The Australian dollar has fallen since late January, including by nearly 8% against the greenback.
  • The decline coincides with signs that the global economic upswing that began in early 2016 may have seen its peak.
  • Modeling from Westpac Bank suggests annual Asian export growth may turn negative in the coming months, an outcome that could see the Aussie dollar fall further.

As a relatively-small, globally-exposed nation, Australia’s economic fortunes are often determined by how things are going elsewhere.

When the global economy is doing well, especially Asia, Australia tends to benefit, and vice versa.

Understandably, the same pattern is often evident in movements in the Australian dollar.

Despite narrowing interest rate differentials between Australia and the rest of the world over the past couple of years, something that would usually act to weaken the Aussie, it’s been flying high recently, underpinned by firmer commodity prices and stronger – and synchronised – global economic growth.

However, the Aussie dollar rally has hit an air pocket recently, falling against most major currencies, especially the US dollar.

While higher US bond yields have undoubtedly contributed to Aussie’s recent decline, it’s also coincided with signs that the global economic upswing that began in early 2016 may have seen its peak.

PMI data has softened, as has global trade flows.

As seen in the chart below from Robert Rennie, head of market strategy at Westpac Bank, annual growth in Asian exports has slowed sharply in early 2018, mirroring the reversal in the Aussie dollar.

Source: Westpac Bank, Twitter

“My Asian dynamic factor export growth model which covers 10 Asian country exports and utilises a range of hard and soft monthly indicators to forecast rate of change three to six months out is increasingly pointing to negative growth mid 2018,” Rennie wrote on Twitter today.

“This is something we have not seen since 2015/16.”

One look at the model’s performance compared to actual export data suggests it should be taken seriously, indicating that the slowdown in Asian trade is likely to turn negative on an annualised basis in the second half of the year.

If that does occur, it suggests recent weakness in the Australian dollar could have further to run yet.

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