Less than two months after predicting the Australian dollar would hit 80 cents by the middle of 2017 — a call that raised more than a few eyebrows when it was first announced — CBA’s FX strategy team has backtracked on its earlier bullish call, making a swathe of downgrades to its forecasts in a research note released earlier on Monday.
Like many forecast revisions of late, the changes are based around the expectation that the Reserve Bank of Australia will continue to reduce interest rates in the months ahead.
When we last compiled our AUD/USD exchange rate forecast on 30 March 2016, the RBA had not cut interest rates. Since early May, we have had one 25bpt RBA interest rate cut, and CBA research is forecasting another two interest 25bpts rate cuts. Hence a total of three RBA interest rate cuts to take the RBA cash rate to 1.25%, now have to be taken into account in the forecast horizon.
The table below, supplied by the CBA, reveals the bank’s new Australian dollar forecasts compared to those offered in late March.
Of note, the CBA sees the Australian dollar finishing 2016 buying 73 cents, down from 78 cents forecast previously, with its June 2017 forecast also sliced by 5 cents to 75 cents.
While it has trimmed its forecasts for the Australian dollar out to the middle of next year, unlike many other forecasters, the CBA’s FX team, led by Richard Grace, is not anticipating a large depreciation in AUD/USD in the months ahead, which is partially in response to the bank downgrading its forecasts for the speed and level of monetary policy tightening in the US in the years ahead.
“We now expect the FOMC to implement a more drawn-out tightening cycle,” said Joseph Capurso, senior FX strategist at the bank, in a research note last week.
“We expect the FOMC to hike by only 0.25% in December 2016, 2017, 2018, 2019 and 2020. Previously we expected increases in the Funds rate in June and December 2016, 2017 and 2018. Under both our new and old forecasts, the terminal rate of the target range of the Funds rate is 1.50-1.75%.
“We find it very difficult to make a case that the USD will significantly strengthen enough to put extreme downward pressure on the AUD/USD exchange rate.”
The CBA also believes improved labour market conditions in Australia, a modest recovery in global commodity prices and an expected narrowing in Australia’s current account deficit will also add support to the Aussie, helping to cushion the scale of its decline moving forward.