NAB is expecting the AUD to fall further to $US0.88 by the year’s end, with weaker Chinese and commodity markets adding to the downward effect of the Fed’s QE tapering.
Just last week, NAB forecast the Australian dollar to be worth $US0.93 by the end of this year and $US0.83 by the end of 2015, after falling from parity in mid-May.
The bank told clients last night that it had updated its forecast to $US0.88 by the year’s end and $0.83 by the end of 2014.
The Fed’s QE tapering alone “would justify an AUD/USD rate in the low 0.80s”, NAB said.
Here’s what else it said:
Whether or not the RBA do see fit to further reduce the Cash Rate (we have one more cut pencilled in for this cycle, in Q4 2013) has much less bearing on our AUD view than what happens with implied US rates.
If the RBA is not going to cut again, this is probably because the currency is falling further, so the causality here runs from the currency to interest rates, not vice-versa (i.e. rates inaction will hardly be supporting the currency).
At the same time, we project a further, albeit modest, decline in Australia’s Terms of Trade though 2014 resulting from increased commodity supply that kicks in alongside a somewhat weaker Chinas growth profile than previously expected (we currently have 7.5% for 2014 but may revise lower after the Q2 GDP data next month).
This should be an additional weight on the currency (Chart 5) and underlies our forecast for AUD/USD at 0.83 at the end of 2014 and falling as low as 0.80 in 2015 assuming the Fed is by then able to start lifting the Fed Fund Rate off the near-zero floor.
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